If you’re a self employed person or are looking at taking the plunge and becoming an entrepreneur, one thing you have to consider is how you will save for retirement.  Since you won’t have the option of a 401k, there are several other retirement account type options that you will want to think about using.  Among them are:

• SEP IRA
• SIMPLE Plan
• Solo 401(k)
• Keogh Plan

Today I want to look at what many consider one of the better options for tax deferred investing for self employed individuals, the SEP IRA

What Is A SEP IRA?

First of all, let’s get the definitions out the the way.  What does SEP IRA stand for?  When I first started researching the topic I was reading lots of articles talking about how self employed individuals were taking advantage of the accounts, so I assumed it meant “Self Employed IRA”.    After reading up on it a bit more I realized that my assumption was wrong.  SEP IRA actually stands for Simplified Employee Pension Individual Retirement Arrangement.  It is basically an easy way for small businesses to set up a retirement account option for their employees with minimal administrative costs or paperwork.

The SEP IRA is pretty much like a traditional IRA account, although it does have some differences, especially as it relates to the contribution limits.  The contribution limits for a SEP IRA are higher.

SEP IRA Rules

As an employer there are rules and regulations you need to follow when you open a SEP IRA.  Most of the rules that apply to Traditional IRAs also apply to SEP IRAs.  Among the SEP provisions:

• All eligible employees must be provided with plan benefits, and a separate IRA account.   If you are self employed with no employees besides yourself, it isn’t an issue. If you have employees, it is something to consider.
• Part time employees who are 21 years of age who have worked 3 out of the preceding 5 years, earning $500 or more annually will be eligible.
• Only the employer can contribute to the SEP IRA.  If you work for a company that provides one, only your employer can contribute to the account.
• You have until the tax filing deadline of April 15th to establish and fund your SEP IRA.
• Withdrawals from a SEP IRA are treated the same as withdrawals from an IRA account – with a 10% early withdrawal penalty, and taxes charged at your current rate.
• Only income from the business can be contributed – you can’t contribute money from your day job if you have one.

SEP IRA Contribution Limits

Contributions to the SEP IRA are subject to yearly limits, however, they are higher than many other similar account types.  For example, for tax years 2009 and 2010 you can contribute up to 25% of an eligible employee’s compensation, up to a limit of $49,000.  Extrapolated from the 25% rule the income threshold for a SEP IRA is then $196,000.

Example: Let’s say you make $100,000 a year and you’re self employed.  Under a SEP IRA you would be able to contribute 25%, or $25,000 to your plan.

No catch-up contributions are permitted for older employees.

Benefits Of The SEP IRA

There are several benefits to having a SEP IRA account.  Among them:

• If you are an employee at a small business that has a SEP IRA plan, you are 100% vested in the contributions your employer makes, right away.  The money is yours!
• Tax deferred investing!
• High contribution limits for self employed individuals.
• Easy to setup.  Usually can be done simply by filling out IRS Model Form 5305-SEP
• Less paperwork and administrative costs after the plan is setup.
• Flexible annual contribution obligations – a good plan if cash flow is an issue.  You can contribute 10% one year, and then 5% the next if you want.

Do you contribute to a SEP IRA as a self employed individual, or do you have one through an employer? How has it worked out for you? Have we missed any important details about the SEP IRA? Tell us about it in the comments.

This article was written by Peter Anderson. Peter Anderson is a Christian, husband to his beautiful wife Maria, and loves reading and writing about personal finance. You can find out more about him on the about page or check out his other sites at http://www.quicktofit.com and http://www.logosforwebsites.com. You can also follow him on Twitter at @moneymatters.

Copyright © Bible Money Matters – please visit biblemoneymatters.com for more great content.

Bible Money Matters Email Newsletter | Fan BMM on Facebook | Follow BMM on Twitter | BMM Iphone App

Related Posts

• 2010 Roth IRA Conversion Rules
• What Is A Roth IRA And What Are The Benefits?
• Economic Crisis Means Great Time To Buy a Roth IRA
• How To Learn Investing Without A Formal Education
• 3 Things To Remember About Roth IRAs
• Is Math The King Of The Financial Jungle?

Related Posts

• No Related Posts

• Retirement Plan Contribution Limits for 2010 It's time to adjust our retirement plan contributions for 2010. These plans include 401(k) plans, individual and spousal IRAs, and our Health Savings Account, which we use for retirement savings. Here is the 2010 contribution limit data, courtesy of the IRS: 2010 401(k)/403(b) Contribution Limits : After many expressed concern......
• Roth IRA and Traditional IRA Tax Implications in Plain English When deciding between a Roth IRA and a Traditional IRA and the tax implications, you just need to remember one little fact.  You will pay taxes on that money.  The only questions are: when and how.  There are other differences, like the withdrawal rules, contribution limits, and income limits, but......