There are so many unique benefits to being an entrepreneur. Self-employment comes with the possibility of virtually unlimited income potential, special freedoms and the joy of getting to say you are self-employed. However, one big area of concern that many entrepreneurs have with self-employment has to do with retirement. Unfortunately, individuals who are self-employed must handle retirement all on their own. There is no separate account automatically set up account, there is no employer matching your contributions, and there is no automatic withdraws from your paycheck. In order to save for your retirement as an entrepreneur, you need to be willing and able to save for retirement on your own. This is where the SEP-IRA comes in.
How Does a SEP-IRA Work?
A SEP-IRA is a special retirement account that is ideal for self-employed individuals. It is also a great plan for entrepreneurs who want to offer their employees with retirement plans. While there are many different types of retirement plans that entrepreneurs can qualify for, this one is specifically meant for entrepreneurs, meaning it is filled with features designed specifically for the challenges that many business owners face when trying to save for retirement.
Just like any other traditional retirement account, the money distributed earns interest over time and certain penalties and fines will occur when you borrow from the SEP-IRA before age 65 or a certain number of years have passed.
Who Qualifies for a SEP-IRA?
A few different types of people qualify for SEP-IRAs but mostly any employer will qualify. You can own a sole proprietorship, be in a partnership, own a corporation or run a non-profit organization. You just need to have one or more employees in order to establish a plan. These retirement funds also work for self-employed business owners, and they can have themselves qualify as the one employee.
Employees must also meet a few requirements including being at least 21 years old and earning at least $550 for the year. You also need to work for the employer for three out of the five years prior to which the contribution to the account is being made.
The Advantages of a SEP-IRA?
One of the great things about SEP-IRA accounts is that they are specifically designed for small business owners, not just a type of retirement plan that can work for small business owners. The SEP (Simplified Employee Pension) plan has a low start-up cost, compared to most other retirement plans, and it costs very little to operate.
The SEP-IRA covers you and your employees, and if you want to help your team members save for their retirement, you can contribute up to 25 percent of each employee’s pay into the account. Contributions that you make into each employee’s account are also tax deductible. This is perhaps one of the biggest benefits for most individuals.
If you own your own business, then you don’t have to be worried about your company being taxed on any of the earnings from your plan’s investments. SEP-IRA plans are also ideal for entrepreneurs because they are very flexible. You don’t have to contribute a certain pre-determined account every year. Plus, if money is tight one year, you actually can go without making any contributions at all and won’t be penalized for it.