Self-Employed with Few to No Employees? Consider a SEP IRA as a Retirement Plan Option

By Chelsea Adams, PhD

When it comes to opening retirement accounts, especially as someone who is self-employed, the decision can be confusing and stressful. Do you go with a SIMPLE IRA, Traditional or Roth IRA, 401(k) Plan, or something else? What else is out there to help you, the sole employee and business owner, save for retirement without big contribution limitations or unruly expenses for upkeep?

SEP IRA is an abbreviation for Simplified Employee Pension Individual Retirement Account. Unlike traditional IRA or Roth IRA accounts, which allow you to put away $6,000 a year toward retirement, a SEP IRA allows you to contribute up to $61,000[i] a year. Contribution limits do apply: you cannot exceed the lesser of 25% of your compensation or $61,000. The account is tax-deferred, meaning that you don’t pay taxes on earnings until you start taking distributions from the account. You also don’t have to contribute to your account every year, allowing you flexibility to contribute as you can and adjust the contribution percentage based on your ability to save. 

Not sure if you’re eligible? If you’re an employer, you’re automatically eligible for a SEP IRA. If you have employees, you must contribute on their behalf if the following conditions are met:

1. The employee(s) are at least 21 years old.
2. They have worked for you for three of the last five years.
3. They earned at least $600 from you from 2016 through 2020 or $650 in 2021.

Whatever you contribute to your account, you must contribute to eligible employees’ SEP IRAs. For example, if you contribute ten percent of your compensation to your plan, you must also contribute 10% of your employees’ contributions to their plans. Since this can be a burden on employees who are lower earners, SEP plans are considered appropriate mainly for the self-employed rather than for small-business owners with more than a few employees. Small business owners should consider other routes, such as a SIMPLE IRA[ii].

If you’ve decided that a SEP IRA is the best option for you, you can work with a financial advisor to get your account set up. You’ll need a formal written agreement to start, followed by providing information about the SEP IRA to eligible employees. Once those requirements are met, your financial advisor will help you set up separate accounts for each eligible employee. Upon account funding, your financial professional will help you determine how best to invest the funds based on a number of factors including your risk tolerance and when you plan to retire. For more detailed information about how a SEP IRA could be right for you and your business, we invite you to contact us and set up a no-obligation meeting.