Here’s all you need to know about SEP IRAs for the self-employed.

A SEP IRA can be one of your best choices if you are self-employed and are looking for good retirement plans. If you are a business owner who has one or more than one employee or you have freelance income, then you can open a SEP IRA. The SEP-IRA is formally known as the “Simplified Employee Pension” Plan IRA. This pension plan contains an IRA at its core; however, helps in larger tax deductions and contributions than that of the traditional IRA.

How can you start a SEP IRA?

The major advantage of a SEP IRA is that it is very simple to set up and manage as well. Complicated paperwork is also not included in the SEP-IRA.

  1. You would have to start the process by selecting a trustee who would be able to manage your SEP-IRA plan.
  2. This trustee could be a mutual fund family, a bank, or a brokerage firm,
  3. You would have to create a written agreement which would explain the plan details and its benefits. Form 5305-SEP i.e. Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement would be provided by the IRS to simplify the procedure.


Working process of the SEP IRA.

 The working process of the SEP-IRA is almost similar to that of the traditional IRA. The contributions made into the SEP-IRA are tax-deductible and the money that is contributed can be easily invested into a self-directed account. The earnings accumulate in a tax-deferred manner and are withdrawn at the age of 59 and a half.

 One of the major differences between the SEP-IRA and traditional IRA is their limit of contributions and the catch-up contributions. In a traditional IRA, the contributions you are making can be limited to not more than $6000 in a year or to $7000 if your age is 50 years or more. But, in a SEP IRA, there is no provision for additional catch-up contribution if you are above the age of 50 years.

 How can contributions be made into a SEP IRA?

 It is feasible to invest in a full-service brokerage firm and trade any type of investment selected. You have the liberty to choose if you wish to hold the plan in a managed option. Moreover, contributions can be made into your SEP IRA of the previous year even until the extended tax deadlines. In this case, you have filed a request for a tax deadline extension in the year 2019; you still have to file the tax returns by the deadline of 15th October then you would still be able to make contributions into the SEP-IRA by the deadline.

 Moreover, there are no provisions for catch-up contributions in the case of Roth SEP IRA. It is advisable that if you are earning within a considerable income limit, you must make contributions to the Roth IRA and can rather set up a separate Roth IRA. Your contributions into the Roth IRA plan are good as long as they are combined with the SEP contributions and do not exceed $56,000.

 The pros and cons of SEP IRA 

Pros of SEP IRA

Cons of SEP IRA

The high limit for contribution i.e. $57,000 in 2020 and $56,000 in the year 2019

There is no feature to provide catch-up contributions if you are 50 years old or above.

This is easy to set up and manage

No features available like the Roth version i.e. the advantage of opting for payment of taxes now and taking on distributions later on during your retirement.

SEP IRA can be combined with a traditional or a Roth IRA.

If you are contributing for yourself then required proportional contributions must be made for every eligible employee

No need for commitment to contributing to the SEP-IRA even in the next year.

SEP IRAs would need minimum distributions to begin at the age of 72.

The contributions made into the SEP-IRA are tax-deductible which includes those contributions that are made into the employee accounts.

In SEP IRA, the distributions which are made before the age of 59 and half years are taxed and there is a 10% penalty if the major reason for distribution does not satisfy the exception of early withdrawal.



 So, a SEP IRA would help in providing a chance for contributing a good amount every year and will also let your savings grow in a tax-deferred manner. SEP IRA would be very much helpful if you do not have other employees and are not even planning to hire employees soon.