A SEP IRA is also known as a Simplified Employee Pension Individual Retirement Arrangement. This is used by business owners when they want to provide retirement benefits for themselves and also their employees. Businesses will make contributions into an account for the benefit of their employees and these types of accounts are available to most different types of businesses, particularly those with not many employees. SEP-IRAs are not taxed each year, instead they are only taxed when a withdrawal is made, leaving them tax exempt for a long time, often several years.
One of the best things about a SEP-IRA is that you have a much higher maximum contribution limit. This means that in years if you make a lot more money you can contribute a lot more to the account, then in the following year if you don’t make a lot, you don’t have to contribute as much as you are safe in the knowledge that you contributed a lot the previous year.
Setting up a SEP-IRA is incredibly easy and actually not that different from setting up a normal IRA. You do not deal with the IRS and all the work is done by an investment firm of your choice. You simply fill out a form, keeping a copy for yourself and your own records, and providing another copy to your investment firm. A lot of people prefer dealing with an independent investment company rather than the IRS as it is often a much more personal service, and people like to choose their own company as they can pick someone they trust. Another benefit of using a SEP-IRA is that it requires very little work once you have completed the initial set up. All you need to worry about is keeping the original form and your trustees (your chosen investment firm) will take care of everything else. This is a great choice for people who don’t have the time to fill out annual tax returns or keep other records.
If you are self-employed then an SEP-IRA is a great way to save for your future without worrying about record keeping, filling out loads of forms and having to keep track of everything. There is also the added advantage of being able to contribute more than you would with a normal retirement plan – meaning you can use the account to your advantage. You also have the option of withdrawing the money without paying a fine, for certain reasons only – such as buying your first home or paying for unexpected medical bills. There are conditions with this though, so make sure you have a look at the fine print before doing this. If you are in any doubt, you can always speak to your chosen investment firm or a financial advisor who will advise you on what is best for you and your business.