SEP IRAs don’t get a lot of attention in the investment world, but they offer employers a wonderful way to set up retirement plans for their employees without the cost of more traditional accounts like 401Ks. If you are self-employed or work for a small business, you may very well have a SEP plan yourself.

SEP IRAs work much in the same way as traditional IRAs with a few differences. Below we’ve explained the most important aspects of SEP IRAs that you should know.


1) Higher contribution limits

SEP IRA Contributions cannot exceed 25% of your annual income OR $55,000 in the year 2018.

Traditional IRAs on the other hand have contribution limits of $5,500 and 401Ks have contribution limits of $18,500 by the employee and a maximum contribution limit of $55,000 from all contribution sources.


2) Employer contributions only

Unlike 401Ks or Traditional IRAs, only your employer can contribute to your SEP IRA account. This means employees cannot put money into these accounts. They can, however, open and contribute to a traditional IRA.


3) Money is vested immediately

Unlike many employer sponsored accounts, such as 401Ks, SEP plans fully vest immediately. This means an employee does not have to meet certain criteria, such as staying at the company for a certain number of years, to own the money.


4) Have the same Taxes as a regular IRA

While SEP IRAs vest immediately, as we discussed in #4, SEP IRAs are treated the same as traditional IRAs when it comes to taxes. This means SEP plans are subject to early withdraw penalties; so, if you plan to take money out of your SEP plan before the age 59 ½, you may be subject to paying both income tax as well as a 10% early withdraw penalty on the amount taken out of your SEP account.

For example, if you took $10,000 out of your SEP IRA account, your income tax bracket is 33%, and you are 55 years old, you may be subject to paying $4,400 ($10,000 x .33 x .1) in taxes and only receiving $5,600.


5) You pick the investments

SEP IRA accounts act very similarly to traditional IRAs when it comes to investing your money. Your employer can designate which particular investments you are eligible to put your money in, but employees are then responsible for picking and investing the money themselves.


If you have a SEP plan and need advice on how to manage your money, be sure to reach out to us and speak to one of our retirement experts.