Is SEP IRA a Good Retirement Option for Self-Employed Professionals?

Being your own boss comes with unmatched freedom, yet retirement planning is often more complex for independent professionals. Unlike traditional jobs, where retirement is built-in, this path requires proactive planning.

Fortunately, there are a number of solutions available. The right one for you will depend on a number of factors including your personal goals and income level, which you can discuss with a financial advisor.

What Is a SEP IRA?

A Simplified Employee Pension (SEP) IRA is a type of traditional IRA that individual self-employed professionals or self-employed professionals with employees can use. SEP IRAs allow employers to set aside funds in IRA retirement accounts for themselves or for their employees. Contributions are tax-deductible and are held in the employee’s name.

Plans are easy to set up with a simple, one-page form. Then, business owners can open a SEP IRA account through a bank or other financial institution. For employees to be eligible for a SEP IRA, they must be 21 or older, have worked for the employer for 3 of the last 5 years, and have received at least $600 in compensation during the year.

What Are the Advantages of a SEP IRA?

A SEP IRA is easy to set up and operate and does not have annual fees or setup costs. Flexible annual contributions are allowed, which means you don’t have to contribute each year. If your business has a tough financial year, you can choose not to contribute. On the other hand, in a strong year, you have the option to make a larger contribution.

What Are the Disadvantages of a SEP IRA?

Only employers can contribute to SEP IRAs. Participants are limited to a $69,000 contribution limit or 25% of wages (for 2024), and no catch-up applies for older participants. You’re not required to contribute to a SEP IRA each year. However, if you decide to, you must contribute the same percentage to both your own account and those of all eligible employees. IRAs are therefore ideal for self-employed professionals who have few or no employees and are looking for a flexible way to save for retirement.

SEP IRA Contribution Limits

• SEP IRA contributions are limited annually to the smaller of $69,000 or 25% of total compensation.
• Withdrawals are subject to the general limitations imposed on traditional IRAs, with additional tax applying if a participant makes a withdrawal before age 59 ½.
• SEP IRA contributions and earnings can be rolled over tax-free to other IRAs and retirement plans.

SEP IRA Examples

Example 1: Employee of a small business

Amy, age 36, works for a small business and earns $48,000 annually. The maximum contribution her employer can make to her SEP IRA is $12,000 (25% x $48,000).

Example 2: Self-employed business owner with no employees

Jacob, age 63, is a self-employed professional earning $200,000 annually. With a SEP IRA plan, his maximum possible contribution for 2024 is $69,000 (the lesser amount being $200,000 x 25% = $50,000.

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.