SEP IRA

A SEP IRA is a retirement account for self-employed people and small business owners. It offers higher contribution limits than traditional and Roth IRAs, and the employer can deduct contributions from income taxes. It is easy to set up, and a broker that offers SEP IRAs can guide you through the process.

The maximum SEP IRA contribution is 25% of net earnings from self-employment (not including contributions for yourself). The limit can be adjusted for inflation annually. If you are a freelancer or a contractor and your income fluctuates from year to year, it is easy to calculate your SEP IRA contribution. In most cases, it equates to about 20% of your gross income.

The contribution limits for employees in a SEP IRA are based on the average of their annual compensation for the past three years. Fidelity recommends saving at least 15% of pretax income for retirement each year, including company-sponsored plans and individual retirement accounts such as SEP IRAs and 401(k)s. Employees can roll over their contributions from a SEP IRA to another account, but they will have to pay tax on any earnings that are withdrawn before age 59 1/2.

SEP IRA Rollover Rules

You can generally roll over funds from a SEP IRA to another eligible retirement account, such as a Traditional IRA or a 401(k). However, the receiving account must permit SEP IRA rollovers, so it’s essential to check with the financial institution holding the new account to ensure they accept SEP IRA rollovers.

Direct rollovers: It is generally recommended to perform a direct rollover, also known as a trustee-to-trustee transfer, when moving funds from a SEP IRA to another retirement account. This involves the funds being transferred directly from the financial institution holding the SEP IRA to the new retirement account without you ever having direct access to the funds. This method helps avoid any tax withholding or potential penalties.

Indirect rollovers: If you choose to do an indirect rollover, you’ll receive a distribution check made payable to you. In this case, you have 60 days to deposit the funds into another eligible retirement account to avoid taxes and penalties. However, keep in mind that the financial institution may withhold 20% of the distribution amount for taxes, which you’ll need to make up when depositing the funds into the new account. The direct rollover method is usually preferred to avoid these tax consequences altogether.

Rollover limits: There are no limits on the amount you can roll over from a SEP IRA to another retirement account. However, be aware of any contribution limits that may apply to the receiving account.

Remember, these rules are a general overview, and individual circumstances may vary. It’s important to consult with a professional to get personalized advice based on your specific situation.

How to Set Up a SEP IRA?

To set up a SEP IRA, you’ll need to submit a written plan document to the IRS. The IRS provides a sample form, called Form 5305-SEP. You can also find a SEP IRA provider, such as a broker or insurance company, that will help you prepare your plan document. Make sure you compare these providers before choosing one, as they can vary in terms of fees and investment options.

It’s important to remember that SEP IRAs must be taken into account when planning for retirement. Unlike traditional or Roth IRAs, you can’t withdraw funds from SEPs before age 59 1/2 without incurring a 10% early withdrawal penalty and paying income taxes. SEP IRAs also follow the same rules as other IRAs when it comes to required minimum distributions.