SEP IRA
If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.
Who can open one?
The SEP IRA is available to sole proprietors, partnerships, C-corporations, and S-corporations.
How it works
Contributions to a SEP IRA may potentially be tax-deductible. The amount you can put in varies based on your income. The most an employer can contribute to an employee's SEP IRA is either 25% of eligible compensation or $57,000 for 2020 ($56,000 for 2019), whichever is lower. (Note that the rules on determining eligible compensation, which are different for self-employed and employee SEP participants, can be complex. Consult a tax expert or the IRS website for details.)
If you have employees, you have to set up accounts for those who are eligible, and you have to contribute the same percentage to their accounts that you contribute for yourself. Employees cannot contribute to the account; the employer makes all the contributions.
Who it may help
This account works well for freelancers and sole entrepreneurs, and for businesses with employees (as long as the owners don't mind making the same percentage contribution for the employees that they make for themselves). The SEP IRA is generally easy and inexpensive to set up and maintain. Plus, there are typically no tax forms to file.
Things to keep in mind
The deadline to set up the account is the federal income tax filing deadline.
In next blogpost, we will discuss Self Employed 401(k).