Pre-tax accounts are good for retirement planning. It’s easy to enroll and invest in a 401K with your company but what if you don’t work for a company? What if you are your own boss, you’re a freelancer, or self-employed? A Simplified Employee Pension Plan (SEP) allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP. My wife is a freelancer, and she executed her first SEP IRA contribution.
As a self-employed business owner, a SEP IRA is a way to contribute pre-tax money to a retirement account. Contributions an employer can make to an employee’s SEP-IRA cannot exceed the lesser of:
- 25% of the employee’s compensation, or
- $61,000 for 2022 ($58,000 for 2021 and $57,000 for 2020)
Open a SEP IRA account with your broker. It was easy to do this online and it took only 5 minutes to open. One limitation with my broker is that I either had to wire or send in a check to fund the account. Once it’s funded, you can invest it anyway you like.
Similar to a traditional IRA, contributions are pre-tax. The same traditional IRA withdrawal rules apply where if you withdraw your money prior to 59 1/2, you will incur a penalty. Your money will grow pre-tax so when you withdraw, it will get taxed. You typically have until April 15 to be able to contribute to the prior year.
A few benefits for opening a SEP IRA are
- Quick and easy to open with no to little cost
- Contributions are tax deductible for your business
- Contribution limits are more than your traditional 401K/IRA limits
- Growth is tax-deferred
As a self-employed business owner, you get twice the benefit. SEP IRA contributions are a tax deduction for your business and you’re contributing to your retirement. A SEP IRA is a great way to contribute to a retirement account for business owners especially if you’re self-employed. Once you’ve funded your account, do your research, invest, and watch your retirement account grow. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook, Instagram, and Pinterest.
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