Is a SEP IRA Right for You??

Now that you are saving for retirement in an IRA be that a Traditional or ROTH IRA you are ahead of most at this point.  But did you know that there is a third type of IRA.  For some there is a third choice at least called the SEP IRA.  SEP stands for simplified employee pension and is an IRA that allows employers to contribute to the IRA for their workers.  And even better yet it works for self-employed individuals as well and they can contribute to their own SEP IRA.  Now you may be asking yourself why would I want a SEP IRA and not a Traditional or ROTH IRA.  The answer to that is the amount you can contribute to the IRA.  For Traditional and ROTH IRA in 2014 you can contribute $5,500 and $6,500 a year for those 50 and older.  For a SEP IRA you can contribute 25% of your pay up to $52,000 a year.  Now that will really allow you to save some serious money for your retirement as compared to the two more widely known IRA’s.

And as compared to a 401(k) where you are limited to the plans choice of investments a SEP IRA is only bound by where and who you have administer the IRA.  This opens up the investment choices to almost all of the mutual funds, ETS, bonds, equities, precious metals and even real estate.  All you need to do to have just about any option there is as far as an investment is to have a self-directed IRA where you pay a small fee for someone to administer the IRA for you.  In the event you do not go with a traditional broker check with a financial planner to see what options really do make the most sense.

Here are some more details on SEP IRA’s:

  • Only the employer or a self-employed person can contribute to the IRA but employees are also able to contribute to their own IRA’s as well.
  • Contributions are on a pre-tax basis.
  • The account grows tax-deferred so you can buy and sell assets in the account without capital gains tax at the time of the transaction.
  • Withdrawals are taxed as income.
  • They are 100% vested at the time of the investment.
  • Must be the same for all eligible employees.
  • Early withdrawals occur prior to age 59 ½ and are 10% plus taxes.
  • At age 70 you must start taking withdrawals.

While they are not available for everyone they are a very useful tool for retirement planning.  Look into the SEP IRA as an option and if you have any questions seek the advice of a financial planner.

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