Find out how a SEP-IRA can help you save for retirement.
Money Girl
217 MG SEP-IRA: Should You Have One?
Hey, Fidelity, what's it cost to invest with the Fidelity app? Start with as little as $1 with no account fees or trade commissions on US stocks and ETFs. Hm, that's music to my ears. I can only talk. [MUSIC] Investing involved risk, including risk of loss, zero account fees apply to retail brokerage accounts only. Sell or assessment fee not included, a limited number of ETFs are subject to a transaction-based service fee of $100. See full list at Fidelity.com/commissions. Fidelity brokerage services LLC, member NYSE SIPC. [MUSIC] Calling all future shapers and dream chasers, MSU Denver works with you online and on campus. Learn with faculty and peers to forge a career. Your next starts now. We are the changemakers. MSU Denver. [MUSIC] Hi, everyone. You're listening to the Money Girl podcast. [MUSIC] I'm Laura Adams, the author of Money Girl Smart Moves to Grow Rich. Nadine S. sent in a question about SEP retirement plans. She says, "I work a full-time job for a corporation where I contribute to a 401K with a company match. I also have a Roth IRA that I personally contribute to." In addition, I opened a business, a dance and performing arts school where I am the sole employee. I'd like to learn more about contributing to a SEP and any limitations to having one if I also contribute to a 401K and a Roth IRA. If you're a self-employed or own a small business with employees, you might be like Nadine, who's looking for a way to sock away even more money for retirement. If you want a great way to invest more of your income and get a nice tax break at the same time, one option is a SEP or Simplified Employee Pension. In this podcast, I'll tell you what you need to know about who can have a SEP, how to SEP one up, and the limitations that exist if you also contribute to other kinds of retirement accounts. A SEP is known as a SEP IRA, and it's a retirement plan that allows an employer or someone who's self-employed to set aside money for themselves and for their employees. The IRA part comes in because contributions are made on a pre-tax basis to a traditional IRA. You probably know that stands for Individual Retirement Arrangement. A SEP IRA is available to any size business, whether you're a sole proprietor, a partnership, or a big corporation, and it's very simple and inexpensive to set up and maintain. You can use a SEP IRA to create a healthy retirement nest egg, whether you're a full-time business owner or a part-time entrepreneur like Nadine. You set up the account, but it's always owned and controlled by the employee or by you if you're an owner employee. First, I'll discuss the rules that apply if you have a business with employees, and then I'll tell you how a loan self-employed person can take advantage of a SEP. A defining feature that you need to understand about SEP IRAs is that employees can never contribute their own money to the plan. Contributions can only come from the employer. You can make SEP IRA contributions for each of your employees, including yourself, up to 25% of each employee's compensation for a maximum amount of $49,000 in 2011. But the rules don't allow you to be stingy because you have to offer a contribution rate that's uniform for all employees, including yourself. That means if you create a SEP IRA for yourself, you also have to set one up for each of your eligible employees and contribute the same percentage to their accounts as you do for yourself. For instance, if you put 10% of your pay in a SEP IRA, you also have to contribute 10% of each employee's pay to their SEP IRA. If you increase your contributions to 12%, you also have to increase their contributions to 12%. You get the idea. However, there's no requirement to make any contributions at all. If you have a bad year, you can contribute nothing, and if you have a profitable year, you can turbocharge your contributions up to the maximum amount. You get a nice tax break for being so generous because, in general, the contributions you make to your employees, SEP IRAs, are tax deductible. Now, let's cover the rules for a SEP IRA if you're self-employed and don't have any employees. Maybe you're a one-woman web designer, actor, bookkeeper, cat sitter, or a dance teacher like Nadine. You can make contributions on behalf of yourself if you have net earnings from the business. You can contribute an amount to your own SEP IRA that totals 20% of your net self-employment earnings up to $49,000 for 2011, but if you have a net loss in your business, you can't make any contributions. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. 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Visit ixcel.com/moneygirl to get the most effective learning program out there at the best price. Calling all future shapers and dream chasers, MSU Denver works with you online and on campus. Learn with faculty and peers to forge your career. Your next starts now. We are the change makers. MSU Denver. Ryan Reynolds here for, I guess, my hundredth mint commercial. No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no. Honestly, when I started this, I thought I only had to do like four of these. I mean, it's unlimited to premium wireless for $15 a month. How are there still people paying two or three times that much? I'm sorry, I shouldn't be victim blaming here. Give it a try at midmobile.com/switch, whatever you're ready. $45 up from payment equivalent to $15 per month, new customers on first three month plan only, taxes and fees extra, speeds lower above 40 gigabytes of seat details. There are some special rules for figuring how much of your SEP IRA contributions are tax deductible when you're self-employed. There's a worksheet that you can use to calculate your deduction in IRS publication 560, retirement plans for small business. A SEP IRA is a completely separate retirement plan that you can have in addition to a regular IRA, a raw IRA, or even another workplace plan, like a 401K, if you're a go-getter like Nadine and work a full-time job in addition to having your own business. However, the total amount you can contribute to an employer plan plus your SEP IRA contributions is limited to 100% of your compensation up to $49,000 for 2011. Let's say you're 35 years old and have a day job as a computer programmer where you earn $75,000 and a part-time business as a web designer that nets you $30,000. Here are the potential retirement contributions you could make. You could contribute the maximum amount to your 401K at work, which is $16,500. For your SEP IRA, you could contribute 20% of your net earnings, which is $6,000. And for a traditional or raw IRA, you could contribute the maximum amount or $5,000. That's a grand total of $27,500 in retirement contributions that come with fantastic tax benefits. If you read or listened to last week's show called Should You Contribute to Both a 401K and an IRA, you learned that some or all of your traditional IRA contributions may not be tax deductible when you or a spouse are covered by a retirement plan at work. A SEP IRA is one of those employer retirement plans that may make you ineligible for traditional IRA tax deductions when you make over a certain amount. Be sure to listen to that episode for more details about the income thresholds for each tax filing status. But this wouldn't be a potential issue for Nadine because she said she's contributing to a Roth IRA, not a traditional IRA. When it comes to taking money out of a SEP IRA, the rules are generally the same as for a regular traditional IRA. If you withdraw money before you reach age 59 and a half, you're typically subject to a hefty penalty of 10% and have to pay ordinary income tax on the distribution. You're required to take taxable withdrawals once you reach age 70 and a half, and you can roll over your SEP contributions and earnings to a regular IRA or to another type of qualified retirement plan tax-free. It's easy to set up a SEP IRA by completing Form 5305-SEP and opening the account with a bank, insurance company, or other qualified financial institution. Each account owner decides how to invest the funds in their SEP IRA. You can put the money into most mainstream investments like stocks, mutual funds, and money market funds. You're always 100% invested in a SEP IRA, which means that you own all the money in the account and can take it with you if you leave an employer or call it quits with your business. Using a combination of tax-advantaged accounts to save for your future is a smart way to make your investment dollars go farther and make sure you'll be sitting pretty with a cushy retirement fund. If you like the tips you get in the Money Girl Podcast and want to take more control of your money, I think you'll like my book, Money Girl Smart Moves to Grow Rich. It's available at your favorite bookstore imprint or as an e-book for your Kindle, Nook, iPad, PC, Mac, or smartphone. It would make a great graduation present. You can even download two free book chapters at smartmoves2growrich.com. If you're on Twitter, be sure to follow me. My username is Laura Adams with No Space. I'm also on Facebook under Money Girl. Submit your money questions through social media or email me at money@quickanddirtytips.com. I'm glad you're listening. Cha-ching. That's all for now. Courtesy of Money Girl, your guide to our richer life. Calling all future shapers and dream chasers. MSU Denver is a place that meets your pace. We have drive and dedication to help you reach your destination. We're a school that works for you and with you at every step. Online and on campus learn with faculty and peers to forge a career. Tomorrow can't wait. Your next starts now. We are the changemakers. MSU Denver. Imagine earning a degree that prepares you with real skills for the real world. Capella University's programs teach skills relevant to your career so you can apply what you learn right away. Learn how Capella can make a difference in your life at capella.edu. [BLANK_AUDIO]