A SEP (Simplified Employee Pension) IRA is type of traditional IRA for small business owners or self-employed individuals, and allows for the tax-deferred bonus for those planning for retirement.
As its name suggests, a SEP provides an easy method for employers to contribute to their own retirement accounts, as well as their employees'. Participants deposit to an individually generated IRA or Annuity, which adheres to the same investment, distribution, and rollover rules,
according to the IRS.
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Similar to most retirement investment plans, there are pros and cons with a SEP IRA. Here are some examples:
According to CNN Money, one major benefit of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. For 2015, business owners were permitted to contribute up to 25 percent of income or $53,000, whichever is less, according to the IRS.
"A SEP IRA may be your best bet if you are a one-person show and plan to keep it that way," reports CNN Money. "You can open one at virtually any bank, mutual fund company or brokerage firm, and pay low or no annual account fees. Your contribution limit is based on a simple formula: You can put away as much as 25 percent of your net income, up to a cap that increases periodically to keep pace with inflation."
For a small business owner, CNN Money asserts that SEP IRAs are attractive because of how simple and cheap they are to set up, and contributions are tax deductible. A SEP IRA's funding flexibility is also a draw.
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If you have a tough year financially, you can choose not to contribute to the plan. If you have a great year, you can fund the plan with a larger contribution than you'd originally intended.
According to Investopedia, another bonus is that employees are able to "use the same account to which SEP contributions are made for their regular Traditional IRA contributions."
The biggest negative to SEP IRAs is employee contributions aren't allowed. Other types of employer-offered retirement programs like 401(k)s, 403(b)s and simple IRAs let you allocate a portion of your paycheck prior to taxes. A SEP is solely based on an employer distributing funds at his discretion.
That said, a company can't selectively decide which employees will benefit. It must contribute for all of them or none of them.
Another drawback is that a SEP IRA doesn't allow for "catch-up" provision, and doesn't allow additional contributions by people older than 50,
reports The Nest.
Despite this negative, traditional IRAs and Roth IRAs limit annual contributions to $5,000 (as of 2012), while a SEP IRA's $50,000 limit accounts for the absence of a catch-up provision.
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