SEP IRAs


Simple Employee Pension Individual Retirement Accounts (SEP IRAs) are private retirement accounts set up by businesses to offer retirement benefits for the owners and their employees. Even one person businesses are allowed to open these accounts.

SEP IRA contributions are added to Traditional IRA accounts. Similar investments are allowed.

Contributions to the plan are voluntary and as much as 25% of compensation can be contributed. Thus, if someone makes $50,000 a year, as much as $12,500 can be added. These contributions offer tax deductions and the SEP IRA funds are taxed when the funds are taken out during retirement,

There is a yearly contribution limit of $54,000 (as of 2017), so someone making, let’s say, $300,000 can’t contribute $75,000 (or 25%), but a maximum of $54,000. There’s a $3,000 extra catch-up limit for those who are 50 or older.

Outside of employer contributions, employees can also contribute extra funds to the IRA accounts such as Roth (if qualified) and their own Traditional IRA.

Let’s say, Mike makes $30,000 a year and his employer contributes 25% or $7,500 to Mike’s account. With Mike’s income, Mike is eligible to contribute to his Roth and Traditional IRA accounts he has. If Mike is under 50, he can contribute $5,500 per year to his IRA accounts.

So, let’s say Mike contributes $4,000 to Roth and $1,500 to Traditional IRA.

First, his Traditional IRA contribution will give him a tax deduction, and his funds within this type of an account will grow by $9,000 (including his employer‘s contribution of $7,500).

Later on, when he retires, he’ll need to pay tax when he withdraws money from this account (including tax on capital gains over the years), which will grow tax-deferred prior to retirement.

At the same time, his Roth IRA for the year will grow by $4,000. He didn’t get a tax deduction on it, but he won’t pay taxes on this account when he retires.

Eventually, Mike, at retirement, will end up with Social Security pension (given he worked long enough, at least 40 quarters) and with funds in Traditional (including SEP) and Roth IRAs.

On top of it, let’s assume that Mike also worked somewhere else where he had his 401(k) plan. He can keep it or roll it over to his IRA accounts.

If he rolls over Traditional 401(k) to his Traditional IRA account, he’ll pay no taxes at conversion. If he rolls over Roth 401(k) to Roth IRA, he’ll pay no taxes as well. But, if he decides to roll over Traditional 401(k) to Roth IRA, then he’ll need to pay taxes at conversion (hoping for tax breaks later when he retires).

As can be seen from this example, it is possible to have several retirement accounts in the United States.

 
SIMPLE IRAs

Savings Incentive Match Plan for Employees (SIMPLE) IRA is a plan for business owners and their employees to contribute part of their compensation pre-tax to the plan. That gives tax savings, while saving money for retirement.

Employees can defer as much as 25% of salary, for up to $54,000 per year (as of 2017), with $3,000 extra for those 50 years old and up. 

Under this plan, employers are also required to match contributions of their employees up to 3%. (Not limited by annual limit.)

Another option for employers is to make non-elective contributions to employees’ SIMPLE IRAs (which is regardless of whether employees contributed their own funds or not). This can be done for up to 2% (with annual limit of $270,000 as of 2017).


This plan may affect your limits when it comes to other plans. So carefully check with your plan’s administrator, your accountant, and/or Internal Revenue Service.

 
Solo 401(K)s

The options for self-employed don’t end there. Now, Solo 401(k)s offer business owners as well as their spouses a way to contribute money for retirement without the complex ERISA rules for standard 401(k) plans. The contribution limit for 2016 is 20% of income plus $18,000 for sole proprietor businesses. For those over 50, there’s an extra $6,000 allowance.



Related articles on this site: 

There are plenty of options for self-employed to save for retirement

SEP and SIMPLE Individual Retirement Accounts (IRAs)


SEP IRAs as well as SIMPLE IRAs are forms of employer-sponsored retirement plans in the United States. In addition, sole proprietors can choose a Solo 401(k) plan.