Whether you're self-employed or have employees, you may be able to contribute to a
Simplified Employee Pension, or SEP IRA. The maximum contribution limit for 2018 is $55,000, or 25 percent of your employees' eligible compensation (20% of your net earnings if contributing to your own account), whichever is less. Contributions can only be made by you as the employer — employees cannot contribute to a SEP IRA — and are generally tax deductible. Depending upon your circumstances, you may be able to contribute significantly more to a SEP IRA than to a traditional IRA.
What potential advantages do SEP IRAs offer?
"SEP IRAs are a flexible choice for business owners," says Judith Anderson, senior vice president, Retirement and Personal Wealth Solutions at Merrill Lynch. "Each year you decide how much to contribute, depending on your capacity." Because SEP IRAs don't require yearly contributions, "a SEP IRA may be a feasible option for businesses with variable cash flow," she says. "In addition, SEP IRAs require less paperwork than many
small business retirement plans."
With a SEP IRA, the interest, dividends, employer contributions and other investment earnings have the potential to grow, federal income tax-deferred, until they are withdrawn during retirement. You can also consolidate your retirement assets by rolling over accounts held in former employers' 401(k), 403(b) and governmental 457(b) plans into a SEP IRA. A SIMPLE IRA may also be rolled over into a SEP IRA after you've held your SIMPLE IRA for at least two years (beginning with the year in which the first contribution is made to such account). Of course, consolidating retirement assets isn't right for everyone.
Consider all of your choices before deciding whether rolling over may be right for you.
Footnote 1"SEP IRAs are a flexible choice for business owners. Each year you decide how much to contribute, depending on your capacity."
— Judith Anderson, senior vice president, Retirement and Personal Wealth Solutions at Merrill Lynch
One more note: SEP IRA contribution limits are subject to an annual cost-of-living adjustment and may vary from year to year. In addition, contributions to an owner-employee's account and deductions for those contributions may vary based on your net earnings and self-employment tax deduction.