Prepare for Retirement with a SEP IRA

A SEP IRA (Simplified Employee Pension) is one of the most popular retirement plans for small businesses. A self-employed business owner can make SEP IRA contributions into an individual retirement account for himself and his employees. The Simplified Employee Pension plan is favored among small business owners because SEP IRA rules make them an easier employee pension plan to establish and administer than 401(k) plans. Additionally, SEP IRA contributions are generally 100% tax deductible for the employer, within guidelines established by the IRS and Department of Labor Employee Benefits Security Administration. Although it is the employer that funds the plan, employees typically have the option of opening their SEP retirement plans at the financial institution of their choosing. CamaPlan is at the self-directed SEP IRA vanguard, allowing investors to allocate their retirement funds into numerous types of assets beyond the usual mutual funds. Alternative investment options include real estate, gold and silver, business ventures, and loans, providing the opportunity to diversify your portfolio and make high-yield investments. Call CamaPlan today to start the conversation about self-directed SEP IRA retirement plans for small business owners and their employees. We can provide you with the complete guide to retirement for individuals who wish to control their own future with self-directed investments.

SEP IRA Details

How Does It Work?

As its name implies, the SEP IRA definition is a simple and easy type of retirement plan that businesses owners can set up to make contributions to their employees’ retirement savings (including themselves). It can also be an ideal plan for high earning self-employed individuals. Setting up a SEP IRA requires only three basic steps:

  1. The employer drafts a formal agreement to provide employee benefits, such as the SEP Adoption Agreement form for prototype accounts or IRS publication Form 5305-SEP. Tip: CamaPlan’s prototype agreement may be the appropriate documentation if your company also offers other employer-sponsored retirement plans like a 401(k).
  2. The employer provides all eligible employees with copies of the agreement and related institutions and information.
  3. Employees who wish to participate open their individual retirement accounts, and the employer makes the SEP IRA contributions to the financial institution/trustee.

Virtually any type of company may enter into a SEP individual retirement arrangement, including a sole proprietorship, partnerships, corporations (including S corporations), and the self employed. SEP IRA distributions follow the same rules as those for a Traditional IRA, in that minimum distributions must begin by age 72.

Please Note: Required Minimum Distributions have been waived for 2020 under the CARES Act, and the age for Required Minimum Distributions has been changed under the SECURE Act.

More information on changes in Required Minimum Distributions

Unlike Traditional IRAs, SEP plans must be offered to all eligible employees, including those who have passed age 72. Like a Traditional IRA, SEP contributions are made with pre-tax dollars and the income is tax-deferred. Contact us to learn how SEP IRA rules apply to your small business. CamaPlan is your guide to retirement investments made with the freedom of self-direction to invest your money as you see fit. Our expert retirement planning advisers can also help you compare the SEP IRA vs SIMPLE IRA, the SEP IRA vs Roth IRA, and explain the differences between self-directed IRAs & mutual funds.

Investment Options

How is Eligibility Determined?

There are several basic criteria an employee must meet to participate in an employer-sponsored SEP retirement plan. The SEP IRA definition set forth by the Internal Revenue Service requires that employees:

  • Are at least 21 years old.
  • Worked for the company for at least 3 of the last 5 years (they need not be consecutive years).

Internal Revenue Service guidelines also permit an employer to more broadly determine which employees may participate in a SEP plan, as long as the same standards are applied equitably to all employees. Additionally, each individual’s Simplified Employee Pension must be funded at the same percentage rate based on their income, up to the SEP IRA contribution limit. There can be no favoritism towards more heavily compensated employees; the employer must select the same SEP IRA rates for all individual retirement plans.

Making Contributions

SEP IRA accounts are funded primarily by employer contributions, since it is a form of pension. Unlike some pensions, SEP IRA rates of tax-deductible maximum contributions are substantially higher than Traditional or Roth IRA limits, which is one of the reasons why they tend to be excellent for the self-employed individual or small business owner who has a high income. A SEP IRA calculator is a helpful tool for determining the maximum allowable annual SEP IRA contribution limit for each employee based on their wages. A self-employed owner’s contribution is based on net profit minus one-half self-employment tax, minus the contribution for him or herself. If you have an unincorporated business, such as a sole proprietorship, your SEP IRA contributions may be up to 20% of your net adjusted self-employment income. As the small business owner, something to know about retirement planning and self employment is that the income tax deductions on contributions to a Simplified Employee Pension account are different for self-employed individuals. A SEP IRA calculator and IRS Publication 560 can help you determine how to deduct your SEP IRA contribution.

See more for SEP IRA contribution limit

Advantages for Small Business Owners or the Self-Employed:

  • Contributions are generally 100% tax-deductible.
  • After initial set up, no ongoing IRS reporting required (unlike for a 401(k), Individual 401k, or some other business retirement plans).
  • May be able to claim up to a $500 tax credit for start up costs for each of the first three years.
  • Affordable to manage and maintain.
  • Contributions are not required annually, giving businesses the flexibility to stop or reduce SEP contribution amounts in years when profits are lower.
  • The plan can be terminated at any time.

Benefits for Employees:

  • The retirement account is fully vested immediately.
  • Investors who open a CamaPlan self-directed retirement account can invest in virtually limitless assets, far beyond those offered by typical brokerage services.
  • May still contribute to a Traditional or Roth IRA; contribution limits are not affected by the employer’s SEP contribution. Because of the high contribution limits, a SEP can be an excellent retirement savings plan for investors with high self-employment income, especially if they have already reached the annual IRA contribution limit on their Traditional or Roth IRA.
  • Participation in a Simplified Employee Pension plan does not affect eligibility to invest in other types of retirement funds such as mutual funds after-tax annuities. Consider after-tax annuities life insurance against outliving your other retirement savings, as opposed to the primary retirement arrangement. Contact your personal financial adviser for a complete guide to retirement planning using a broad range of investment tools, such as the various types of individual retirement accounts, an employer-sponsored plan like a SEP IRA account, SIMPLE IRA, pension, or 401(k), purchasing mutual funds after-tax investments, and funds after-tax annuities life long payment accounts.
  • Employer contributions to a SEP are not counted as additional taxable income, unless they exceed the maximum SEP IRA rates of contribution for the year. Income tax is not paid on contributions or earnings until the SEP IRA distributions begin.

CamaPlan Means Flexibility

CamaPlan was created by investors, for investors and we are leaders in administering truly self-directed plans. Experience the true financial freedom that comes with making your own informed investment decisions, rather than relying on the limited financial products offered by the average brokerage firm. It is your money and your retirement: shouldn’t you be the one to determine its future? Through our Cama Academy courses and webinars, we provide investor education to expand your knowledge base and empower you to make confident decisions.

Open a SEP IRA