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Account Types: SEP IRA

Account Types: SEP IRA

Purpose built for Small Business Owners and Self-Employed

Annual Contribution Max: $57,000 or 25% employees pretax income

Why we like SEP IRA’s:

  • High contribution limits
  • For employees, immediate vesting can be an advantage 
  • Total investment control
  • Easy set up and management
  • No filing requirements
  • No fiduciary duties
  • Can be combined with Profit Sharing Plan 

Why we don’t like SEP IRA’s:

  • For employers, immediate employee vesting may be a disadvantage
  • Universal application to employees
  • No employee deferrals
  • No access to loans

A remarkably misunderstood option for small business owners. A SEP IRA (SEP stands for Simplified Employee Pension) is a unique type of IRA used chiefly by self-employed people and small business owners. Although it could be used by any size company, there are some provisions that make it less popular for those companies. For employers, these retirement plans are easier to establish than qualified plans, have practically no filing requirements, and are less time consuming than traditional 401(k) plans.  However, employers that use SEPs must provide benefits to almost all employees (even part time may qualify).  The requirements for coverage include: Attainment of age 21 or older, performance of services for three of the last five years, and received compensation of at least $600 during the year. 

In so many ways, a SEP IRA operates similarly to a traditional IRA. The biggest advantage of a SEP IRA is in the contribution limits, it’s a fantastic option in that aspect and a big part of the InSight-full® planning process for small business owners and other highly compensated professionals. The employer can contribute up to 25% of each employee’s income up to a maximum of $57,000 in 2020. If you’re self-employed, you can contribute up to 25% of net income up to the same limit (contribution limits subject to IRC 415(c)}.  The most concerning drawback of the SEP-IRA for employers, is that funds are always immediately 100% vested in employee accounts. Which is to say it is a risk for employers and a benefit for employees.

essential insights

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