As a self-employed person, I don’t have access to a typical 401(k) Plan. However, with some research, I was able to replace my old 401(k) with something even better…a SEP IRA!
A SEP IRA, or Simplified Employee Pension Plan, is one of the many retirement plans for self-employed individuals and small-business owners save for their retirements. With a SEP IRA, you can contribute up to 25% of your income with a maximum contribution limit of $56,000 in 2019, up from $55,000 in 2018.
SEP IRA is a traditional retirement account where contributions are tax deductible and your savings grows tax-deferred until withdrawn. Upon withdrawal, or conversion to a Roth IRA, you will pay taxes on the amount withdrawn or converted at your regular tax rate.
You are eligible to contribute to a SEP IRA if you are a sole proprietor, in a partnership, or a business owner. Also, you are eligible if you earn any self-employed income, even if you are already covered by a retirement plan at your full-time job. The contribution deadline is usually April 15 of the following year — i.e., you have up to April 15, 2020 to contribute to your 2019 SEP IRA.
 Can I set up a SEP for my self-employment income if I participate in my employer’s retirement plan?
Yes, you can set up a SEP for your self-employed business even if you participate in your employer’s retirement plan at a second job.
As mentioned above you can contribute the lower of 25% of your income or $56,000 for 2019 tax year. For example,
- If you earned $100,000 eligible income, you can contribute $25,000 to SEP IRA (because you hit the 25% limitation).
- If you earned $400,000, you can contribute $56,000 (because you hit the maximum amount limitation).
It is important to note that SEP IRA is funded by the EMPLOYER (unlike most plans which are funded by the EMPLOYEE). This means that there is no catch-up contribution for older
Advantages of SEP IRA
- Contributions to SEP IRA are deductible for income taxes purpose.
- Your investment grows tax-deferred until withdrawn.
- Wide investment options similar to Traditional IRA and Roth IRA.
- Easy to set up. Any brokerage firm or financial institution will be able to assist you.
- You can contribute to SEP IRA in addition to other retirement plans, such as 401(k), Traditional IRA and Roth IRA
- No phase out limitation regardless of your income.
Limitations of SEP IRA
- Contribution limit is 25% of your compensation.
- There is a maximum contribution limit of $56,000 for the 2019 tax year.
- There is 10% early withdrawal penalty fee if you withdraw any money before you reach the age of 59 1/2.
- And the big daddy of SEP IRA limitation — You must have a written agreement to provide benefits to all eligible employees. Note the name, Simplified Employee Pension Plan (see IRS.gov Participation Requirements)
Overall, I am happy with my SEP IRA since it allows me to save a lot of money on income taxes and I can contribute far more money than I could’ve with the mainstream retirement accounts like 401(k), Roth IRA, and Traditional IRA.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.