Complete guide to SEP IRA: Everything you need to know

por Carol · novembro 25, 2024

A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a retirement savings plan primarily designed for small-business owners and self-employed individuals. It allows you to save for retirement while benefiting from tax advantages.

The key feature of a SEP IRA is that it works similarly to a traditional IRA, where contributions are tax-deductible for the business, and investments grow tax-deferred until retirement. Upon withdrawal in retirement, distributions are taxed as income.

The SEP IRA is designed to be straightforward and easy to set up, making it an appealing option for those who do not have the time or resources to manage complex retirement plans.

SEP IRA contribution limits

The contribution limits for a SEP IRA vary depending on the compensation of the participant. In 2024, you can contribute the lesser of $69,000 or 25% of compensation.

This limit increases to $70,000 in 2025. These high limits make the SEP IRA particularly attractive to high-income earners who want to maximize their retirement savings.

For self-employed individuals, the contribution is based on their net self-employment income, with the contribution capped at 25% of their net income.

The same percentage applies if the business has employees. If the business owner contributes for themselves, they must also contribute the same percentage to their eligible employees, making it a fair plan for all involved.

Importantly, there is no catch-up contribution available for individuals aged 50 or older in a SEP IRA, unlike other retirement accounts such as 401(k)s. However, the lack of required minimum distributions (RMDs) until age 73 provides additional flexibility.

Who is eligible for a SEP IRA?

A SEP IRA is typically best suited for self-employed individuals and small business owners who may have few or no employees. While the plan can be extended to employees, it is especially beneficial for those with a simple workforce.

To be eligible, employees must meet the following criteria:

Be at least 21 years old.
Have worked for the employer for at least three of the last five years.
Earn a minimum of $750 during the year.

If an employee qualifies, the employer must contribute to their SEP IRA on their behalf, and those contributions must match the same percentage of compensation that the employer contributes to their own plan.

While this equal contribution requirement may be a disadvantage for employers with a large number of employees, it still remains an excellent option for small businesses with few employees or for those who are self-employed.

How does a sep IRA Work? The Pros and Cons

The SEP IRA offers several benefits, but like any retirement plan, it also has its downsides.

Pros:

High Contribution Limits: With a contribution limit of $69,000 in 2024, a SEP IRA provides a great opportunity to save a substantial amount for retirement.
Tax-Deductible Contributions: Contributions made to a SEP IRA are tax-deductible, which can reduce your current tax burden.
Easy Setup and Administration: This plan is simple to establish and does not require complicated paperwork or compliance measures, making it a great option for small business owners.
No Required Annual Contributions: Unlike some retirement plans, you are not required to contribute every year, which adds flexibility if your business’s finances fluctuate.
Combination with Other Plans: You can combine your SEP IRA with a traditional IRA or even a Roth IRA to maximize your retirement savings.

Cons:

No Catch-Up Contributions: Unlike other plans, such as 401(k)s, there are no catch-up contributions for those over 50, which limits the ability to save more as retirement nears.
Proportional Contributions Required for Employees: If you contribute for yourself, you must contribute the same percentage for your employees, which could be costly for businesses with multiple employees.
Mandatory Minimum Distributions: Like traditional IRAs, SEP IRAs require you to begin taking minimum distributions by age 73.
Early Withdrawal Penalties: Distributions taken before age 59 ½ are generally subject to a 10% penalty and taxed as income, unless they meet specific exceptions.

How do I open a SEP IRA?

Opening a SEP IRA is straightforward. To begin, you need to choose a provider for your account. Many financial institutions offer SEP IRAs, and you can easily compare options online.

The IRS requires the following steps to set up your plan:

Create a Written Agreement: You can use IRS Form 5305-SEP to formalize your plan or use the agreement provided by your chosen account provider.
Notify Eligible Employees: Provide employees with information about the plan, either through IRS Form 5305-SEP or the documentation from your account provider.
Establish Separate Accounts: You must set up individual SEP IRA accounts for each eligible employee with the chosen account provider.

Once the SEP IRA is set up, you can begin contributing. Contributions must be made by the due date of your federal income tax return, including any extensions.

How do i invest in my SEP IRA?

Once you’ve opened your SEP IRA and made your contributions, it’s time to consider your investment strategy. Your provider will offer a range of options, typically including stocks, bonds, and mutual funds.

For self-employed individuals, choosing the right mix of investments is crucial. If you are young and have a long time horizon, investing more heavily in stocks or stock index funds may provide the growth potential you need. Conversely, as you approach retirement, you may want to shift toward more conservative investments like bonds to reduce your exposure to market volatility.

Additionally, SEP IRA holders can invest in options like bond funds or other index funds, which offer diversification and typically lower risk compared to individual stocks.

A SEP IRA is a powerful tool for small business owners and self-employed individuals to save for retirement, offering high contribution limits, tax advantages, and a simple setup process. While there are some rules and limitations to consider, such as proportional contributions for employees and mandatory distributions, the benefits often outweigh the drawbacks. By carefully selecting your investments and staying on top of contribution deadlines, you can leverage the SEP IRA to build a substantial retirement fund.