Self-Employment: Here’s What to Know About SEP-IRAs

Working for yourself has tremendous advantages for those with an entrepreneurial spirit. If that’s you, you may love being self-employed. What you may not love, though, is that your retirement savings isn’t as easily taken care of as it might be with an employer’s 401(k) plan. Many turn to an IRA when they start their own business or work as a contract employee, but what some don’t know is that there is actually an IRA specifically designed for self-employed individuals: SEP-IRAs. 

What is the advantage of an SEP-IRA?

SEP-IRAs offer generous options for retirement savings. These plans are designed for those who are self-employed or who have a small business with no employees. Similar to a traditional IRA, your earnings grow on a tax-deferred basis. In addition, it is possible that your contributions could be tax-deductible.

So, what makes SEP-IRAs so different from a traditional IRA? Notably, you have the potential to contribute more to your SEP-IRA than you could a traditional IRA. In short, a traditional IRA allows contributions up to $6,000 per year, unless you are 50 or older, in which case you can contribute $7,000. An SEP-IRA, however, allows contributions of 25% of your income for that year or $58,000 (for 2021), whichever is less. 

What are the disadvantages of an SEP-IRA?

Unlike a traditional IRA, SEP-IRAs do not allow for “catch-up” contributions for those 50 or over. In a traditional IRA, this would allow for an additional $1,000 per year for those who meet the age requirements. However, although that extra contribution isn’t available, the overall contribution limit for SEP-IRAs is higher than your average IRA. In addition, there is not an option to have a Roth SEP-IRA, so you don’t have the opportunity to pay taxes now to avoid paying them later. 

Small Business Owners: Are your employees eligible for an SEP-IRA?

If you own your own business, your employees are eligible to participate in the plan if they have been working for you for a minimum of three of the past five years, making at least $600 in the past year. Why don’t more small businesses use this type of IRA then? Because you, as the business owner, would have to contribute as much to their account as you do to yours. For example, if you wanted to contribute 10% of your income, you would also have to contribute 10% of that employee’s income as well. 

Need help planning for your future?

Southwestern Investment Group advisors work with you to identify your goals and create a sensible financial strategy that helps you achieve them. Contact us today to learn how you can meet the needs of retirement while you’re self-employed!

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