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SEP IRA – Intro Guide to Simplified Employee Pension Plans

Donny Gamble
July 15, 2020
what is a sep ira
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IRAs are your protection against the uncertainty of retirement and the future. There are so many different types of retirement accounts, all with their own purposes, benefits, and some with their own unique setbacks.

An SEP IRA can act as a self employed pension plan, or be part of your employee pension plan if you’re working for a small business.

Typically, SEP IRAs are used for freelancers and small business owners with one or more employees (but typically under 25 or so). These simplify taxes and the entire legal process of IRAs, so you can apply your maximum annual deposit with pre-tax dollars and maximize your earnings throughout the year without hitting a new tax bracket.

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Account Minimum: $100,000
Fees: 0.49% - 0.89%

Is a Self-Employed Pension Plan Right For You?

SEP IRAs are best for sole proprietor freelancers that want to begin investing in their retirement as soon as possible. If you work for yourself and sell your services on a non-employment per-contract or per-gig basis, it may be in your best interest to set up an SEP IRA.

Many individuals freelance without it being their full-time income, so we have some exciting news for you.

You Can Contribute to Your Self-Employed SEP & an Employer Retirement Plan as Well

If you freelance part-time and want to maximize your retirement benefits, you’ll be happy to know that you can maintain both an SEP IRA as well as a 401(k) or other type of employer-backed retirement program. 

Double the retirement money!  Of course, it still requires the necessary contribution. If your employment is split between freelancing self-employed income and a standard job, your best course of action would be to make the full contributions to your employment 401(k) if your employer offers a match. 

That way you can use freelance income separately, or if there’s enough coming in, make the full contributions to your SEP IRA as well.

Be Careful if You’re in a Business Partnership

Technically, an employer is the only one that can input money into your SEP IRA. For a self-employed individual, that’s simple. You’re in full control of everything.

But if your business operates as a partnership in any way, there has to be a designated employer, so each individual member of that SEP plan within a partnership will be taxed as such.

You’re Responsible for Current IRA Law

If you maintain your own SEP IRA as a self-employed individual, you have to maintain everything about that account. That means that if the law changes or is altered in some way, you have to keep yourself informed and make the necessary changes or adjustments to your account.

After all, you’re the employer and the employee; there’s no one else that this fall to except you.  While it can sound daunting, the IRS is very transparent about all forthcoming laws with plenty of time to adjust to the changes.

Just do yourself a favor and set a quarterly reminder to take 15 minutes and look over any new information that comes from the IRS regarding SEP IRAs

Even if nothing changes, it’s good to know that you’re up-to-date and confident about all current regulation and law.

Can I Store My SEP IRA with a Different Financial Institution from My Employee’s?

There is no law that points either way on this. If you want your personal SEP IRA to be at Institution A, and your employee’s will be at Institution B, that’s okay. It’s all still part of the same program that you offer to your employees.

However, the entire point of an SEP is that it’s simplified, and storing IRAs at different institutions takes a bit of that simplification out of the process for you.

 If you have a few employees or you are open to the concept of hiring employees in the future (even if you’re just freelancing right now), it’s wise to get an information packet together to state which financial institution you plan on using so that your employees can become aware.

Even so, the SEP IRA goes into your employee’s name, so they’ll have control over it. You still have to wait until they meet the criteria of being with your company for three of the last five years and being 21 or older before they can be eligible for an SEP IRA, so even if you’re not expecting to hire more people and then you do, you have time to develop an SEP IRA plan for your employees.

It’s a quick process once you get familiar with it.

Should You Open a SEP IRA?

At the end of the day, an SEP IRA is the same as a traditional IRA account, it’s just managed and handled a little differently. It allows self-employed individuals and freelancers to have control over an IRA account in the same capacity that a traditional employer would. 

You have all the same benefits and tax advantages of a traditional IRA account.  This essentially replaces the need for a 401(k) for the self-employed (because that would be a silly set of hoops to jump through when it comes from and goes to the same person).

You’ll be able to avoid all the ridiculous reporting mandates set forth by the US government in an SEP IRA, making it much easier to maintain and manage during your career.

SEP IRA FAQ's

Who is eligible for a SEP IRA?

First and foremost, a self-employed individual, whether they own a small business or are a freelancer, can sign up for a SEP IRA.

For employees that are not account holders or proprietors of the business, they must be age 21 or older, and work for the company for three of their most recent five years of operation in order to be eligible.

What is the benefit of a SEP IRA?

A SEP IRA allows employees to save up with pre-tax dollars before it ever hits their paycheck. The SEP IRA account is in their name, but managed by the employer until the time that it is cashed in or if the employee moves to another business. 

It works the same as a traditional IRA account, giving you access to investment opportunities and wealth growth, although employees cannot directly contribute to their SEP IRA.

It has to be done through the employer, which can leave a bad taste in many employee’s mouths.

Can I open a SEP IRA for myself?

Yes, you can open an SEP IRA for yourself if you meet the proper criteria. SEP stands for Simplified Employment Pension, although many mistake it for self employment pension.

If you’re a freelancer, or you own a business with one or more employees that report to you, you’re eligible to open up a SEP IRA. This still follows all the same rules of a traditional IRA account like we mentioned earlier.

Can a LLC have a SEP IRA?

Actually, yes! An LLC can have its own retirement savings account that benefits those who own or operate it, however this can get pretty tricky.

Conditions may differ depending on whether the company is a sole proprietorship or a corporation, but it’s entirely possible.

Just be sure to follow the steps of opening up your SEP IRA properly to avoid any blunders that would classify it was the wrong account type, or designate it to the wrong type of entity.

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About the author 

Donny Gamble

I’m Donny. I’m a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

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