SEP IRAs are having a moment.
As small businesses and self-employment keep growing in the new U.S. economy, many people including advisors are turning to the Simplified Employee Pension plan as a retirement savings tool in place of traditional individual retirement accounts (IRAs) or 401(k)s.
Technically speaking, an SEP IRA is in fact a traditional IRA and follows the same investment, distribution and rollover rules, according to the Internal Revenue Service. Yet unlike a traditional IRA, a SEP IRA plan provides business owners with a simplified method to contribute toward their employees’ as well as their own retirement savings, the IRS says. Only the employer or sole proprietor contributes.
The growth of small businesses reflects the trend toward using SEP IRAs. The U.S. Small Business Administration reports that there are 28 million small businesses in America accounting for 54% of all U.S. sales and 66% of all net new jobs since the 1970s. Further, the Intuit U.S. small business index shows that the hiring rate of small businesses has been rising slowly but steadily since September 2009.
‘One of the More Unique Types of Retirement Accounts’
Certified financial planner Jim Blankenship, president of Blankenship Financial Planning Ltd., describes SEP IRAs as “one of the more unique types of retirement accounts” in a July 6 blog post. “SEP IRAs have a completely different set of contribution limits from the other kinds of IRAs and retirement plans.”
That “completely different” set of limits is much higher than the $5,500 IRA limit (or $6,500 for those age 50 or older).
IRS rules stipulate that contributions to each employee’s SEP IRA can be as high as 25% of compensation or $53,000 for 2015, whichever is less. The same limits on contributions to employees’ SEP IRAs apply to people who are self-employed. Limits apply to contributions to all defined contribution plans on compensation up to $265,000 in 2015.
“The primary benefit of this plan is that it’s simplified (as the name implies) and very little expense or paperwork is involved in the setup and administration of the plan,” Blankenship writes.
In a phone interview, Blankenship added that he has a few clients who use SEP IRAs, and that while he uses a 401(k) plan for his own planning business, if he had it to do over again, he would be just as likely to use a SEP IRA.