Pension plans are disappearing fast. Only 8% of private U.S. companies still offer a retirement benefit program -- and that number is set to fall even further. But for self-employed and small business owners, there's an easy alternative: the Simplified Employee Pension Individual Retirement Account, or SEP IRA.
Diving into IRS rules can be daunting, but SEP IRAs live up to their name -- they're surprisingly simple. Our IRA Center has lots of information to help you get started with IRAs in general, but for now, here's everything you need to know about SEP IRAs in particular.
Who can participate?
If you are at least 21 years old, have worked for your current employer (or yourself) for at least three of the past five years, and have made at least $550 from this job, then you're eligible.
Is there a contribution limit?
Here's where SEP IRAs separate themselves from other IRAs. Whereas traditional and Roth IRAs have a cutoff of $5,500 (or $6,500 for those aged 50 and older), you can load up your SEP IRA with 25% of your income or $53,000 -- whichever is lesser. And while IRA contribution limits have remained unchanged for the past few years, SEP IRA limits are expanding $1,000 each year, paving the way for bigger contributions when that bonus rolls in.
When is the deadline?
The tax man cometh at his usual time. You have until April 15 to deposit money into your SEP IRA for the previous tax year. Filing for an extension is fairly easy, and that'll give you until Oct. 15.
Can I still contribute to my Roth or traditional IRA?
Absolutely. If you're a sole proprietor, you can max out your SEP IRA contributions and still contribute to your personal IRA. However, if you're an employee and your employer is paying into your SEP IRA, the money you put in also deducts from your overall $5,500 IRA contribution limit.
Can I roll over another retirement account into my SEP IRA?
Generally, yes. The IRS is fairly roll-friendly; check out the chart below for your specific situation.
When can I withdraw?
The real retirement party begins when you turn 59-1/2. From that point on, your SEP IRA savings are yours for the taking. And for you supersavers who keep on waiting to withdraw, the government actually requires you to take a "required minimum distribution" when you hit age 70-1/2. Come on -- live a little!
Help! I need my retirement money today!
Uncle Sam set up IRAs of all kinds to incentivize us to save for retirement, so he doesn't like it when we take money early. Except in a few special situations, any early withdraws will be tagged as taxable income and you'll be hit with a 10% fine. That penalty does not at all prohibit you from withdrawing funds early for emergencies, but you shouldn't dip early if you don't have to.
How do I get started?
Deciding to open a SEP IRA isn't enough. As with most things legal, you'll need to sign an official agreement. You can use the IRS' Form 5305, grab one from an IRS-approved financial institution, or make your own. If you're including other employees in the plan, you'll then need to circulate information about the new plan and finally set up a SEP IRA for anyone who's interested. It's a straightforward process, and involving your financial institution of choice from the beginning can make it even easier.