Retirement > 401(k)s & IRAs
SEP-IRA for self-employed
February 11, 2000: 9:01 a.m. ET

Retirement plan offers flexibility and ease for the independent workers
By Jennifer Karchmer
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NEW YORK (CNNfn) - Whether you're a lawyer, a massage therapist or a consultant, when you're self-employed the burden is on you to set up a retirement plan.
    So financial pros say a good alternative might be a SEP-IRA plan that allows you to sock away thousands of dollars more than you can under a traditional IRA. And the SEP, which stands for simplified employee pension, has lower fees and less paperwork than setting up a 401(k) plan for your new business.
    "The SEP plan is beneficial for someone who wants to keep the reporting simple and costs at a minimum," said Carmen Petote, a certified financial planner from Allegiance Financial Advisors in Pittsburgh.
Who's eligible?

    If you're in business for yourself, acting as sole proprietor, and you file a schedule C with the IRS at tax time, you're eligible to set up a SEP-IRA.
    "It's the consultant, the hairdresser, the massage therapist, the self-employed who we see using the SEP-IRA plan," said Stewart Koesten, a certified financial planner in Kansas City.

"The SEP plan is beneficial for someone who wants to keep the reporting simple and costs at a minimum."

-- Carmen Petote of Allegiance Financial Advisors


How much can you contribute?

    The biggest benefit of opening a SEP-IRA for yourself is the amount you can put in each year.
    When you quit your big corporate job and start your own business, you can open a traditional or Roth IRA for your retirement. But it allows you to contribute only up to $2,000 a year. You also can't deduct contributions with a Roth IRA.
    Under the SEP-IRA, you can contribute up to 15 percent of your earned income with a cap of $30,000 annually and you can change the percentage you contribute every year.
    So if you made $100,000 last year, you could put in up to $15,000, or about seven times more than you can in other IRA plans. Over time, that money will grow into a much bigger nest egg thanks to compound interest.

    You could continue contributing to an IRA to complement your SEP-IRA. But be aware that federal guidelines will limit how much of your traditional IRA contributions you can deduct from your taxes, said certified financial planner Steven Kaye of the American Economic Planning Group. The limits depend on your income and marital status. (Click here to read more on IRS rules about SEP-IRAs.)
    For instance, if you were single and self-employed in 1999 with an annual salary of more than $41,000 and contributing to a SEP-IRA, then your contributions to a traditional IRA may not be tax deductible.
    "If you can contribute to two qualified retirement plans, then do it," said Kaye. He suggests you speak with a financial expert about the guidelines since they often change because of inflation.
    "No one dies with too much money," he added.
Less stress

    When you're just starting out managing your new consulting firm, you don't want to be swamped in a heap of paperwork and overwhelmed with excessive fees.
    The SEP-IRA is a simple, low cost -- or no cost -- way to save for your retirement, said Gary Kushner, an employee benefit consultant in Kalamazoo, Mich.
    "You are probably going to find it for free from most banks, mutual funds, brokerage and others," he said. "They will establish an account without a charge and they'll maintain it for you."
How does it work?

    The SEP-IRA is similar to a traditional IRA because you can invest in stocks, bonds, mutual funds, CDs, or money market funds. Each employee has a separate account and designs his own plan.
    If you open a SEP-IRA as a small business owner, you fill out one IRS form and make your lump sum contribution for yourself and any employees by the April 15 tax deadline. Employees don't file anything.
    The money you contribute to the SEP-IRA is tax-deductible, meaning you don't pay taxes on that money.
    So if you decide to work for a small employer who offers the SEP-IRA plan, it can be a generous retirement account, Kaye said. In addition, you are 100 percent vested from the start.
    Under SEP-IRA guidelines, if your employer contributed 15 percent to his own account, then he must contribute the same percentage to your personal account. That's quite a bit more than most 401(k) plans, which typically match about 1.5 percent to 3 percent of your pre-tax contributions.
    However, some drawbacks exist to a SEP-IRA for an employee of a small business. For example:
    *The amount your employer contributes can vary widely from year to year.
    *You may not make your own contributions into your account.
    *You cannot borrow from the plan as you can from a typical 401(k).
    So the simplicity of the SEP-IRA plan may be the key to retirement for self-employed workers diving into opening their own business.
    John Kim, for example, decided to take a chance and start his own media-consulting firm in New York. He's considering a SEP-IRA in addition to his traditional IRA.
    "I don't have a separate benefits division to look into the plan, so I've got to keep it simple," said Kim, who started Sync Inc. with his wife in 1998. Back to top


IRA-SEP for the self employed - Feb. 1, 2000

Retirement plans for small business - April 19, 1999


National Federation of Independent Business

IRS Web site

Security Trust Company

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