The retirement opportunity you may be missing – The SEP IRA
Its is very common for workers to generate some form of income outside of their primary occupation. You may have a full-time job but still seek an opportunity to generate additional income. The extra money could be a potential opportunity to increase retirement savings. A Simplified Employee Pension IRA (SEP IRA) offers an easy and inexpensive way to set this up.
A SEP IRA is an employer-sponsored retirement plan. Contributions can only be made by the employer on behalf of its employees. In this case, you are the employer and the employee. If you do have employees (other than yourself), you need to be aware that anyone who works for the company will be entitled to contributions.
The process for establishing a SEP IRA is fairly straightforward, and you can open this type of account at most brokerages. Once the account is open, contributions are tax deductible for the business. However, no salary deferrals or catch-up contributions are allowed in a SEP IRA.
Once in the IRA, the funds are like any other IRA funds and subject to the same rules. They immediately belong to the employee and you can do whatever you want with them. You could even take an immediate distribution, although this is not recommended. The distribution will be taxable and subject to a 10% early withdrawal penalty if taken before age 59.5, unless an IRS-approved exception applies.
One of the advantages of a SEP IRA over a traditional IRA is the larger contribution limit. For 2019, the limit is the lesser of 25% of compensation or $56,000. This dwarfs the 2019 traditional IRA limit of $6,000 plus $1,000 catch-up if over age 50. SEP contributions can be made up to the due date of your tax return, including extensions. For example, a 2019 SEP contribution can be made up until April 15, 2020 or October 15, 2020 if you filed an extension. Contributions are not required to be made every year, so it provides flexibility if the income you are generating outside of your primary occupation is low or you simply do not want to contribute.
The last piece of good news is that you are able to contribute to a SEP IRA even if you participate in a retirement plan at your main job. You can also fully fund a Roth IRA or traditional IRA up to the allowed limits. Keep in mind that the deductibility of a traditional IRA contribution and ability to contribute to a Roth IRA will phase out depending on your annual income.
Bottom line, if you have a side gig or are self-employed, you could take advantage of the SEP IRA option to increase your overall retirement savings. Be sure to consult with your financial advisor and accountant to see if this is a good option for you.
Feel free to contact Marcos A. Segrera with any questions by phone 305.448.8882 ext. 212 or email: [email protected]
Resources
- https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps-contributions
- https://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/sep_ira
- https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
- https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras
Categories
Recent Insights
-
Incorporating Your Business: Unlocking Retirement and Tax Advantages
Incorporating your business is more than a legal formality—it’s a strategic financial move that can influence your long-term growth, retirement security, and overall tax outcomes. The entity you choose and how you structure your compensation can open (or close) doors to significant tax savings and wealth-building opportunities. Retirement Plan Options for Incorporated Businesses When structured…
-
Financial Self-Care for Women: Simple Practices for a Richer, More Balanced Life
Why Financial Wellness Is an Essential Form of Self-Care In today’s fast-paced world, self-care has become a buzzword, often associated with nature and spa days. However, true self-care encompasses much more, including an often-overlooked aspect: financial wellness. For women in particular, who frequently face unique financial challenges, embracing financial self-care is not just beneficial –…
-
Burnout in the RIA Marketing Seat: Keeping Your Spark Amidst AI and Endless Hats
If you’ve ever worked in a marketing role at a Registered Investment Advisor (RIA), you know the role often comes with an invisible subtitle: “Marketer-slash-everything-else.” Expectations are high, resources are often lean, and success can feel ill-defined. Add the growing pressure around artificial intelligence (AI), and it’s no surprise that RIA marketing burnout is becoming…
-
Turning Wealth Into Wisdom: How Families Shape a Lasting Legacy
Money is more than a tool—it’s a teacher, a mirror, and a powerful force for change. From childhood lessons to family traditions, our financial beliefs and habits are shaped over time. But when families plan intentionally, wealth can do more than last—it can lead. By passing on not just assets but values, purpose, and insight,…
-
Redefining Retirement: How to Repurpose After a Successful Career
A recent report from the Financial Planning Association hit on something we see all the time: people can have their financial ducks in a row for retirement, but emotionally? They’re often miles behind. It makes sense. Leaving a long, successful career isn’t just about money; it shakes up your routine, your social life, and even…