Simplified Employee Pensions, or SEP-IRAs, are a retirement account available to both small business employers and employees under certain requirements. Although I’m sure they are covered more thoroughly elsewhere, I wanted to jot some notes down focusing on the self-employed, that is, you are both the only employer and employee all rolled into one. Beware, during my research I found a lot of outdated and thus inaccurate information online.
Anyone who has any amount of self-employment income, even if you already have a retirement plan with your other job.
Deadline to open and fund?
The same as your tax filing deadline, including any extensions. Without extensions, that’s good ole’ April 15th.
What the maximum contribution amount?
For 2005, the maximum contribution is 25% of the employee’s ‘eligible compensation’, up to $42,000. But for self-employed people, the IRS’s definition of ‘eligible compensation’ is a bit funky. There’s a whole worksheet to figure it out in IRS Publication 560. It ends up being a max of 20% of your net profit from your Schedule C minus the deductions for self-employment tax. Again, the ceiling is $42,000 for 2005.
What the minimum contribution amount?
Zip. Zero. You can contribute a ton this year, and none the next year. Very flexible.
What are the Tax-advantages?
The vehicle for SEP-IRAs is basically a Traditional IRA. Thus, you can deduct your entire SEP-IRA contribution on your taxes. Also, future earnings grow tax-deferred. Of course, this means that distributions will also be taxed upon withdrawal, and early withdrawals have additional penalties.
How to do I set one up?
Much like setting up a Traditional IRA, most financial institutions like Vanguard, Ameritrade, or Fidelity will set one up for you with minimal or no fees. There is also minimal paperwork required, with no annual reports to file.
What if I already have a 401(k) at my other job or Roth IRA?
Contributions to a SEP-IRA do not affect either your eligibility for either of those.
For more information, I didn’t find any one awesome resource, but I did find that most brokerage houses like Fidelity have pretty good updated information. As always, the IRS is the definitive source, although it’s like reading Shakespeare at times. The most pertinent ones are Pubs 560 and 590.