With the many different types of retirement accounts on the market, it can be difficult to keep them all straight. The SEP IRA is one of the retirement account options that you have available to you, and it shares some common characteristics with other retirement accounts out there. Here are the basics of the SEP IRA and what it brings to the table.
SEP IRA Basics
The term “SEP IRA” stands for simplified employee pension individual retirement account. This type of account can be set up by employers or by self-employed individuals to save for retirement. With this account, the employer make contributions to the account on behalf of the employee.
Opening up this type of retirement account that only has some advantages compared to other account options. One of the big advantages of this account is that you don’t have to set aside your own money. Your employer handles this for you. This means that you won’t have to pay taxes on the money that is being put in there for you either. This simplifies things quite a bit, because you do not have to worry about how much you’re contributing.
Another advantage of this type of account is that it has large contribution limits. Your employer can put in either 25 percent of your income or a maximum of $51,000 per year. This is much more than the contribution limits of some of the other retirement accounts out there. For instance, if you opened a regular IRA, you can only contribute a maximum of $5,000 or $6,000 per year, depending on your age.
Although the SEP IRA can work well, it isn’t perfect. One of the drawbacks of this account is that you don’t have any control over what’s going in. If your employer decides not to put much in, this could have a negative impact on your ability to retire comfortably. Another drawback is that you have to pay taxes on the money once you hit retirement. You have no way of knowing how much the tax rates will be when you retire, so there’s a certain level of uncertainty.
The SEP IRA is a pretty simple account to use for retirement. Just make sure that you’re fine with the employer having control over how much goes into your retirement account. As long as that doesn’t bother you, it really is a good account to have.