- A SEP-IRA is a retirement plan for self-employed workers and small business owners. It follows rules similar to a traditional IRA.
- Contribution limits for 2019 are $56,000, or 25% of an employee’s compensation (whichever is less) and must be made by April 15, 2020, or your tax filing deadline if you were granted an extension.
- Maximize your retirement savings by capping out your SEP-IRA as well as another account if possible.
Retirement is a top concern for most Americans, whether they’re self-employed or working for a Fortune 500 company. Unfortunately, one-third of Americans have less than $5,000 saved up for retirement.
If you are your own boss or taken on a side job to complement your regular wages and increase your savings, your self-employment earnings qualify you for additional retirement account options.
It’s key to know which one is right for you to contribute to. We’ve covered the best retirement plans, including the traditional IRA. Now, let’s tackle the specifics of the SEP-IRA plan — the IRA’s version for the self-employed — plus how much you can contribute, and how the SEP-IRA can work with other retirement accounts to help you achieve your goals.
What Is a SEP-IRA?
First things first — what is a SEP-IRA? We will break it down in depth here, but in short, a SEP-IRA is a retirement plan for self-employed workers and small business owners that has similar rules to a traditional IRA:
- Contributions are tax-deductible and can lower your taxable income for the year.
- SEP-IRA earnings grow tax-deferred for as long as they remain in your account.
- Withdrawals from a SEP-IRA are taxed at your ordinary income tax rate at the time they’re taken out.
This is largely where the similarities end. A SEP-IRA is typically funded by the employer (and in this case, it could be you), whereas a regular IRA is funded by an individual. The SEP-IRA doesn’t allow catch-up contributions like a traditional IRA. And unlike a regular or traditional IRA, a SEP-IRA has much higher contribution limits.
SEP-IRA Contribution Limits for 2019
SEP-IRA contribution limits set this account apart from a traditional or Roth IRA. While traditional IRA contributions are limited to $6,000 per year, SEP-IRA contribution limits are much higher.
- 2019 SEP Contribution Limits: $56,000 or 25% of the employee’s compensation, whichever amount is less.
- 2019 SEP Contribution Deadline: April 15, 2020. However, if you are granted an extension to file your tax return, the deadline to open your SEP-IRA and contribute to it are also extended to the new deadline.
The higher contribution limit and more flexible deadline are both key advantages of the SEP-IRA. Opening a SEP-IRA can be as easy and convenient as applying for a regular IRA, making the SEP-IRA a great, simplified option if you’re self-employed (or have a side hustle) and want to boost your retirement savings.
Can You Make SEP-IRA Contributions?
If you are a self-employed worker or small business owner, you may be eligible to contribute to a SEP-IRA.
For those who have a side hustle or are self-employed, a SEP plan allows them to make retirement contributions similar to a traditional IRA plan but with higher contribution limits. If you’re self-employed and want to boost your retirement savings, you can make SEP-IRA contributions on your own behalf. Self-employment income can be spotty, but you only get one shot at retirement, and those tax-deferred contributions can greatly help. These can also be a great way to lower your tax bracket for the year.
If you make a substantial amount from side hustling, a SEP-IRA can be a great way to boost your retirement account when paired with your employer’s 401(k). Because that side-hustle money can also move you into another tax bracket, the money you deposit into a tax-deductible SEP-IRA can lower your taxes at the end of the year.
If you’re a small business owner with eligible employees (anyone older than 21 who has earned at least $600 from you in a year and worked for you for at least three years of the last five years), you can open a SEP-IRA account for your employee(s) and start contributing on their behalf. IRA contributions might be a wonderful motivational tool. Note that employer contributions to an employee’s account belongs to the employee 100% once funded. Remember, SEP-IRA contributions cannot exceed 25% of the employee’s salary or the $56,000 limit, whichever is less.
Common SEP-IRA Contribution Questions
While the premise of a SEP-IRA is fairly straightforward, there are still some SEP-IRA rules we should cover. Here are a few commonly asked questions.
1. Can you make catch-up contributions?
You generally cannot make catch-up contributions with a SEP-IRA. A SEP-IRA is entirely employer-funded, whether that’s by you via self-employment or as a business owner, whereas catch-up contributions (for individuals 50 or older) are entirely from you as the employee.
2. Can you contribute to a traditional IRA and SEP?
Your SEP plan determines whether or not you may contribute to another IRA within the plan. If yours allows contributions to a traditional IRA within the plan as well, you may only get the tax benefits to a certain point or from one account over the other. A traditional IRA that is yours as an individual outside of work, however, is not constrained by these rules and you are free to make contributions to your own IRA within the IRA rules.
3. Do you have to contribute to a SEP every year?
Whether you’re the business owner, working for a small business, or self-employed, you’re not required to contribute to a SEP every year. However, if you employ multiple people and decide to contribute to one employee (such as yourself), you would have to contribute to all eligible accounts.
Beyond SEP-IRA Contributions: Maximizing Your Retirement
Even if you’re hitting the maximum contribution for a SEP-IRA, consider whether you can do more to maximize your retirement and ensure you’re comfortable in your sunset years.
1. Contribute to a Separate Individual Retirement Account
If your SEP-IRA allows it, contribute to a traditional or Roth IRA as well. Your employer (or you, if you’re self-employed) will contribute to your SEP, so your contributions to another account can be a great way to ensure you’re building a retirement that will meet your goals. This is especially important if you’ve capped out on your SEP contributions but are still within the Roth IRA income limits.
2. Think About Tax Deductions Before the Filing Deadline
It’s easy to contribute a random amount and not consider the tax implications until tax time rolls around. Think about your annual contributions ahead of time, and compare them with your earnings. If you can contribute the right amount to lower your tax bracket, consider doing so after speaking with a tax adviser. This can result in a lower tax burden on your tax refund. Remember that a SEP-IRA can be funded as late as the tax filing deadline, including extensions.
3. Consult With a Financial Advisor
Retirement savings are important, during the years you’re putting money away for retirement as well as once you’re in retirement. Make sure to speak with a financial advisor about your options between tax-advantaged accounts like an IRA or a 401(k), or even taxable accounts. A financial specialist can help you determine which accounts and investments are best for you. There are a number of stocks, bonds, and other investments you can put your money into and invest for retirement, so explore your options thoroughly before deciding.
Building Tomorrow, Today
Picture the retirement you want and save all you can during your earning years. A SEP-IRA is a great way to save when you’re self-employed or if you’re operating your own small business. Consider contributing what you can into a SEP-IRA if you believe it’s the right retirement account for you.
Even if you can’t hit contribution limits, put what you can into a retirement account. A large portion of the country isn’t prepared for retirement, but you can buck the trend and take control to achieve the retirement you want.