The Freelancer and the SEP IRA Retirement Plan

It seems like every day there is another story about how more and more of the workforce is choosing to freelance and create their own income. With freelancing comes different financial rules to follow. One of the most important questions: how do I save for retirement as a freelancer? In comes the SEP IRA. SEP stands for Simplified Employee Pension. This plan can be highly valuable to freelancers, businesses, and the employees of such businesses. While the SEP IRA is not the only retirement savings option for a freelancer, it is one of the easiest and quite possibly the most user friendly. Therefore, we are going to focus strictly on this plan.

Most Asked About Features

– The money inserted into a SEP IRA is not taxable until it is withdrawn, similar to a traditional IRA
– Contributions are tax deductible
– Up to 25% of your income can be contributed to your plan (not to exceed $53,000 annually in 2015)

Withdrawal Rules

– Money can be withdrawn at any time
– If there is money withdrawn before the age of 59.5 years typically there is a 10% tax (call us if you need more details as there are exceptions to the rule)
– SEP contributions and earnings can be rolled over on a tax-free basis to other IRA’s and retirement plans
– Money must start to be withdrawn by the age of 70.5 years old

How do I make contributions and where does the money go?

– Plans can be opened at a bank or other financial institution
– SEP contributions can be put into many different kinds of investments such as stocks, mutual funds, or savings accounts just to name a few

Other Pros

– SEP IRA’s can be opened within minutes with just a simple form filled out online (either form 5305-SEP or an IRS-approved prototype SEP plan)
– Contribution percentage can be changed on a year to year basis
– Employees are 100% vested
– If excess contributions are made over the deduction limit, the difference can be carried over and deducted in future years

Other Cons

– Loans cannot be taken from a SEP IRA
– Elective deferrals and making contributions to catch-up are not allowed

Are you a freelancer or business that needs help with a SEP IRA or other retirement plan? If so, call Lescault and Walderman at 866-496-2042 today for our expert knowledge and assistance.