Small Business IRA for the Self-Employed?

By Elsie Dudukovich0 Comments

According to a July 2016 US News & World Report article, a SEP IRA is an option that “…offers flexible contributions that are easy for employers to increase, decrease or suspend Here are three things to know about a SEP IRA.

What is a SEP IRA?
SEP stands for Simplified Employee Pension and it was designed for self-employed individuals or small businesses (typically 25 or fewer employees). A SEP has a required minimum distribution at age 70 1/2, similar to the Traditional IRA. Unlike the Traditional IRA, you can continue to make SEP contributions if you continue working past age 70 1/2.

Who can participate in a SEP IRA?
For starters, any employer can set up a plan, even if there is only one employee.

Employees must meet ALL of the following requirements:
  • Be at least 21 years of age;
  • Have worked for the business during any three of the past five years;
and
  • Have earned the $500 annual minimum required compensation.
    • Spouses and children may also participate in the plan and open their own SEP IRAs—as long as they are employees of the company and meet the income requirements.
You can find specific criteria from the IRS here on establishing a SEP.

How much can I contribute to a SEP IRA?
According to the IRS, employer contributions for each eligible employee must be:
  • Based only on the first $265,000 of compensation for 2015 and 2016
  • The same percentage of compensation for every employee
  • Limited annually to the smaller of $53,000 for 2015 and 2016 or 25% of compensation
  • Paid to the employee’s SEP-IRA
Learn more about Small Business Plans with our free Small Business Checklist.