Retirement Accounts for the Self Employed (Part 1 of 5) – The SEP IRA

It seems like October is Independent’s Month at Dollars & Sense Education! I just helped a client who is a Realtor (1099 employee) rollover a 401K from an old employer into a SEP-IRA with Vanguard. If you are self employed or have a side business you can start your own retirement accounts.

When you are self employed there are retirement vehicles that are made specifically for you and can allow you to sock away alot of tax deferred moolah. Independent contractors, sole proprietors and business owners can sign up for:

• Simplified Employee Pension IRA (SEP-IRA)
• Solo 401k’s
• Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)
• Keogh Profit-Sharing Plan or Keough Defined Benefit Plan

Part 1 of this series will describe the SEP IRA. The next three entries will describe the other options and the last entry will discuss what options are appropriate for you according to the kind of business you have and your goals!

Do I Qualify For A SEP IRA?

To qualify you must have self-employment income. Self-employment income consists of net profits from a Schedule C or Schedule F on your tax return, or guaranteed payments from a partnership. If you run an S-Corporation, your corporation will have to set up the SEP-IRA and deduct your contributions from your W-2 salary. You must open and contribute money to a SEP-IRA plan by the due date of your tax return.

Where Do I Set Up a SEP IRA?

SEP IRAs can be setup with the same companies that provide Traditional IRAs and ROTH IRAs although the fees will vary slightly from traditional IRA and ROTH IRAs.

How Much Can I Contribute Annually to a SEP IRA for myself?

Your annual maximum contribution to a SEP-IRA is 20% of your net earnings minus self employment tax from self-employment income or $45,000 (for 2007), whichever is less.

Why Not Just Open a Traditional or Roth IRA?

Do both! You can sock away money in both a SEP IRA, ROTH IRA and a Traditional IRA. You can still contribute to a Roth IRA or a Traditional IRA if your modified gross income is under approved limits. Your employee contribution is capped at $4,000 regardless of the type of IRA you use. Where you sock away the extra dough is the employer contribution (up to $45,000) in the SEP IRA.

What If I Already Participate In My (Other) Employers Plan?

You can have your cake and eat it too! Sock your money away in a SEP IRA and a 401K!

When Do I Set This Up?

This can be setup until you file your taxes, including tax extensions.

Do I Have to Put Away the Same Amount of Money Every Year?

No.

What If I Have Employees?

A SEP allows for a contribution of up to 25% of your employees’ salary per year at a maximum of $45,000 (2007). An employee is defined as at least 21 years old and must have worked for you 3 out of the last 5 years. Contributions to employees SEP IRA MUST BE UNIFORM – that is if you contribute 20% to one employee’s account, you must contribute 20% to all.

Employees cannot contribute to their SEP, unless they are self employed obviously. Employees can contribute to a Roth IRA or a Traditional IRA if their modified gross income is under approved limits. If in the calendar year, the employer doesn’t contribute to the SEP IRA, the employees can contribute to the Traditional IRA regardless of income.

Summary

In short, if work for yourself take full advantage of the tax benefits that affords you. A SEP IRA allows you to defer a significant portion of your retirement savings from taxes. Don’t let Uncle Sam get more than his fair share!

In the next installment of this series (Part 2 of 5) I will describe another kind of retirement account for the self-employed – The Solo 401K!

Other great blog entries on SEP IRAs:

http://www.bargaineering.com/articles/primer-on-self-employment-taxes-or-why-sep-iras.html

http://www.sitelead.com/blog/how-a-sep-ira-can-cut-your-taxes/2007/04/05

http://www.fivecentnickel.com/2006/10/19/opening-a-vanguard-sep-ira-and-executing-a-direct-rollover/

http://taxes.about.com/b/a/257220.htm

Please contact Dollars & Sense Education to bring our “Financial Health 101″ seminar to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
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nicole@daseducation.com
215 – 499 – 3834