Is an SEP IRA Right For You?

Most of us reach a point in our lives where we start dreaming about retirement. Retirement promises a chance to finally pursue the ambitions and activities that our professional, pre-retired lives often disallow—travel, creative pursuits, volunteer work, or simply time spent enjoying our leisure.

Retirement Planning: Problems and Solutions

For any of this to happen, though, you have to arrive at retirement with a certain level of financial freedom. In other words, you need to have a solid retirement plan in place. This is sometimes daunting for employees, but can be especially vexing for small business owners and people without W2 employment—simply because, for these individuals, retirement saving options are not quite as well known.

As a small business owner, you cannot, for instance, reap the benefits of a company sponsored 401(k) or IRA, not unless you actually start one for yourself and your employees. And this begs the question: What are some of the retirement savings tools that small business owners can take advantage of?

There are a few options, some better-known than others. The SEP IRA is one that many small business owners ask about—but what is it, and what does it entail?

Pros and Cons of an SEP

To begin with, this individual retirement account is recommendable only for a fairly narrow subset of retirement savers. Again, we’re talking about small business owners and people who have no W2 income to report. For some individuals in this category, the SEP IRA makes sense.

There are some pros and cons to explore, of course. One pro is that, compared to other retirement account options, the SEP IRA comes with a fairly low administrative cost. That’s always a positive for small business owners.

The drawbacks, though, are that an SEP IRA requires contributions to come out of the pocket of the business owner—not the employees. Your employees cannot contribute to the SEP IRA, so basically you’re giving them a retirement account as a personal gift. Additionally, you have to contribute the same amount for each employee—so you cannot contribute 10 percent for each employee but throw in 30 percent for your own retirement. That’s a pretty rigid requirement.

So who, in the end, is the SEP IRA right for? Generally, it is most strongly recommended for small business owners who have few, if any, employees. But as ever, it is important to consult with a financial planner before making any big decisions. To speak with a member of the Stonepath Wealth Management team, we invite you to call our office today.