SEP IRAs: Did you know?

In order to receive the maximum benefits from your retirement plan, you must first choose the types of accounts that are right for you.  This can sometimes be an arduous task due to the number of choices, anywhere from 401k accounts to a wide variety of IRAs.  One popular choice, especially for those individuals who are either self-employed or own a small business is the SEP IRA.

Fact #1:  Almost Custom-Made for Owners of Small Business and the Self-Employed

Simplified Employee Pension IRAs, also called SEP IRAs, seem to be increasing in popularity each year.  Among other advantages, SEP IRAs feature low administrative costs, which translates to a higher profit for a small business owner or self-employed person.  

An individual can easily qualify because a person who is either a freelance worker or self-employed can label himself or herself as an employee, and that's the primary criteria.  In fact, to enlist fully, you only need to meet these qualifications:

• A minimum age of 21 is required for all covered individuals.

• The employer (aka self-employed individual), along with all of his or her employees, must be on the same plan.

• Each employee is required to have worked for the employer a minimum of three years out of the past five.  These years do not need to be consecutive.

• In the year that an employee qualifies, he or she must have received compensation of at least $500.

Fact #2:  For Many, SEP IRAs are Better Than 401k Plans

These are two of the most popular choices right now, if not the two most popular, when you compare different types of retirement accounts.  Each choice offers stability and flexibility for the account holders, and can be quite beneficial. 

Here are some differences to consider, and you can make your own decision as to whether an SEP IRA is the way to go:

• SEP IRAs often have lower contribution limits than your typical 401k account.  Of course, this is only a concern for those who have the funds to maximize their contributions in the first place.

• SEP IRAs were designed to be easy to use.  Many people find 401k accounts to be time consuming and somewhat complicated.  

• SEP IRAs do not allow borrowing against the funds you've deposited into the account.  401k plans do allow for this, though there are restrictions.

Fact #3: SEP IRAs Can Be Considered a Profit Sharing Plan

Although SEP IRAs may not have contribution limits as high as a 401k in some cases, the limits are more than substantial for most people.  The maximum annual amount for an employee is 25% of his or her salary.  If an employee makes $40,000, that means up to $10,000 can be put toward the SEP IRA.  Keep in mind, however, that the annual limit caps at $49,000 and the total contribution for an SEP IRA cannot exceed $245,000.

If you are self-employed or a freelance worker, your individual limit can be a little more confusing.  Currently, the limit is set at 18.6% of your net profits.  Typically, it is a good idea to consult a professional in order to maximize your money.

Fact #4: Having More Than One Account is Allowed

The fact that you have an SEP IRA does not disqualify you from also having a traditional IRA, 401k, or any other type of retirement account.  For those of you who work for an employer in addition to working for yourself, having both a 401k and SEP IRA is fine.  The only restriction is that you are not permitted to use money made from your employer to fund the SEP IRA.

Source: http://firstsecurityfinancialshow.com/blog/bid/104425/SEP-IRAs-Did-you-know

Pierco Energy Gordon Brent Pierce Pierco Management