The SEP IRA: What You Need to Know

The in and outs of the SEP IRA, a business owner's BFF when it comes to retirement plans.

Feb 15, 2014 at 1:00PM

If you're a business owner, there exist several retirement plans that may meet your needs, but the simplest and least costly is the simplified employee pension IRA. Here are a few things every small-business owner needs to know about SEP IRAs.

What it is
An SEP IRA is a type of business retirement plan available to business owners and their employees. SEP IRAs offers tax-deductible contributions, tax-deferred earnings, and a variety of investment options. Any type of business, including sole proprietorships, partnerships, or corporations, can set up SEP IRAs. SEP IRAs are especially attractive to self-employed individuals without employees.

Tax advantages
Contributions made to SEP plans are tax-deductible. In fact, an SEP IRA can potentially save your business up to tens of thousands of dollars in taxes every year. In addition, eligible employees can make traditional IRA contributions to their SEP IRA accounts, allowing them to exclude income from their own individual taxes. Earnings in SEP IRAs also grow tax-deferred.

Contributions
Contribution limits on these plans are remarkably high. For the 2013 tax-filing year, the SEP IRA allows contributions up to 25% of compensation or $51,000, whichever is less. The maximum amount of compensation used in determining your contribution is $255,000 for the 2013 tax year. The same percentage of compensation must be made for every employee. Also, contributions to SEP IRAs are always 100% vested, or owned, by the employee.

Eligibility
Business owners can exclude employees from the plan until they have worked for the business for three of the immediately preceding five years and are over the age of 21.

Cost and simplicity
An SEP is an exceptionally inexpensive business retirement plan. It also don't require special IRS filing like other plans do, which makes it even more desirable for business owners.

Deadlines 
SEP IRAs are the only retirement plans for small-business owners that can be set up after year-end when you don't already have a plan established. You have until April 15 (or Oct. 15 if you're filing a tax extension) to open and fund a plan for the 2013 tax-filing year.

Consider establishing and funding a SEP IRA before the tax-filing deadline. You can find more information about SEP IRAs in a recent article written by fellow Fool Selena Maranjian or directly from the IRS. Then be sure to check out brokerage firms that can help you establish a plan today.

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You’ve fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it’s too late!

Follow Nicole Seghetti on Twitter @NicoleSeghetti. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers