Simplified Employee Pension (SEP) IRAs are for anyone self-employed, owns a business, employs others, or earns freelance income. SEP IRAs offer a way to save a more significant amount than Traditional or Roth IRAs and cost less to set up and maintain than many employer sponsored retirement plans.[1]
Key aspects of Simplified Employee Pension (SEP) IRAs:
- Contributions are only made by the employer but can be reduced, stopped, or increased by an employer. Small business owners often use this type of plan in industries with fluctuations in profits. This allows the owner to contribute to their employee and their own accounts as business permits.[2]
- The yearly contribution limits for employers are up to 25% of the employee’s total compensation with a max income of $305,000 or a maximum of $61,000 for the 2022 tax year. Employer contribution levels need to be the same for every employee under the SEP plan. [3],[4],[5]
- With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.[6]
- If you start a SEP IRA when you have no employees and decide to hire employees, they must also be covered under the plan if they meet the eligibility requirements. Employers must allow all employees to participate if they are 21 and above worked for your business in at least 3 of the last five years, and have made at least $650 in income per year as of 2022. There are some restrictions beyond this for people who are not US citizens and some types of union members.Employers may choose to have more lenient rules like removing the age limit, years of service, or income cap, but they can’t restrict their plans beyond these standards. 2,[7]
- Each owner and qualifying employees have their own SEP IRAs usually set up through the owner’s choice of account provider. These plans are best for businesses that have no or very few employees because they are very strict with contribution amounts- if as an owner you are choosing to contribute 20% of your income to a SEP IRA, then you need to be prepared to add 20% of all participating employee’s salary to their SEPs too. 4
- Investment options are almost anything- individual stocks, mutual funds, ETFs, annuities, UITs, etc. There are investment vehicles that are not allowed in IRAs, including Life Insurance, types of Derivatives Positions, antiques/collectibles, personal real estate, and most coins.[8]
- Fees vary from institution to institution. It is important to understand how much you are paying in fees.
- The earliest you can make penalty-free withdrawals is 59 ½. However, there are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you have medical expenses that exceed 10% of your modified adjusted gross income, the cost for your medical insurance while you’re unemployed, your qualified higher education expenses, the amount to buy, build or rebuild a first home (up to $10,000), your withdrawal is in the form of an annuity, your withdrawal is a qualified reservist distribution, you’re the beneficiary of a deceased IRA owner or the withdrawal is the result of an IRS levy.2
- Required Minimum Distributions (RDMs) need to start April 1 of the year following the calendar year in which you reach age 70½, if you were born before July 1, 1949, or April 1 of the year following the calendar year in which you reach age 72, if you were born after June 30, 1949. RMDs are required even if you are still working. 2
- If you leave an employer, you can take your money with you. These accounts can be rolled over to like tax designated accounts. [9]
If you want to explore additional retirement investment accounts that could work for your goals, Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here.
Sources:
[1] https://www.nerdwallet.com/article/investing/what-is-a-sep-ira
[2] https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep
[3] https://www.theentrustgroup.com/hubfs/ira-contribution-limits-download.pdf
[4] https://www.irs.gov/retirement-plans/how-much-can-i-contribute-to-my-self-employed-sep-plan-if-i-participate-in-my-employers-simple-ira-plan
[5] https://www.investopedia.com/terms/s/sep.asp
[6] https://www.investor.gov/sites/investorgov/files/2019-02/Saving-and-Investing.pdf
[7] https://money.usnews.com/investing/articles/2016-07-06/5-things-you-should-know-about-an-sep-ira
[8] https://www.investopedia.com/articles/retirement/11/impermissable-retirement-investments.asp
[9] https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
https://www.fidelity.com/retirement-ira/small-business/sep-ira
https://investor.vanguard.com/small-business-retirement-plans/sep-ira
https://www.theentrustgroup.com/hubfs/ira-contribution-limits-download.pdf
Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes.
