If you are a salaried employee working for an established company, your employer likely provides you with a range of perks and programs that you’d have to pay for or take care of yourself if you ran your own business. From that ever-flowing coffee in the break-room to solid health insurance to the slice of cake you get on a co-worker’s birthday, there is a lot more than a paycheck your company provides you.
SEP IRA eligibility for sole proprietors, business owners and freelancers
This also can include options for saving for retirement through a company 401(k). But freelancers and self-employed individuals – a rapidly growing segment of the workforce – can’t establish 401(k)’s for themselves. While they can set up traditional and Roth individual retirement accounts (IRA)’s, those who work in the gig economy, work a “side hustle” in addition to their regular employment, or run their own business also have an often overlooked third option for building their tax-free retirement nest egg: the SEP IRA.
What is a SEP IRA and how do I start one?
The “SEP” in a SEP IRA stands for “simplified employee pension.” It can be established by a small business owner for its employees as an alternative to the more onerous process of providing a 401(k) plan, but it can also be used by freelancers and self-employed individuals for their own benefit.
Setting up a SEP IRA is a simple process facilitated by most financial institutions that also assist with traditional and Roth IRAs. All you need as far as the IRS is concerned is to complete and file its Form 5305-SEP.
What are the Benefits of a SEP IRA for Self-Employed/Freelancers?
The main characteristic that SEP IRAs share with their traditional and Roth cousins is that contributions to the account are tax-deductible the year they are made. Similarly, investments in SEP IRAs are tax-deferred, meaning that you won’t be taxed on any income or gains that those investments generate until you withdraw funds from the SEP IRA.
But SEP IRAs offer freelancers and self-employed individuals a significant benefit over other retirement savings options. Specifically, SEP IRAs allow for higher contribution limits, meaning that the tax benefits can be greater during the years you contribute to the account.
SEP IRA Contribution Limits
For both traditional and Roth IRAs, the total annual contribution limits for 2018 are $5,500 if you are under age 50 and $6,500 if you are age 50 or older. But with a SEP IRA, you can contribute up to 25% of your salary, or 25% of your net business earnings (your earnings minus business expenses, SEP contribution, and half of self-employment taxes) for an annual maximum contribution of $55,000.
For sole proprietors, business owners with no employees other than themselves, or those who generate freelance income in addition to a salary, a SEP IRA is an option that should be considered when thinking about how to fund retirement. In determining which retirement savings course you should chart, you should consult with an accountant or other financial planning professional to evaluate your specific circumstances and goals.
If you have questions or concerns about SEP IRAs or other retirement savings issues for you and your small business, please contact us. We welcome the opportunity to assist you.