Investing, Retirement 

Introduction to SEP-IRAs

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SEP-IRA stands for simplified employee pension individual retirement account and is a great way for people who have self-employment income and are looking to reduce their tax burden. Since the employer contributions to a SEP-IRA are tax deductible, you (acting as an employer) can reduce the taxable income of your business by contributing to your (acting as an employee) SEP-IRA account. The net effect is that you’re contributing your self-employment income into your own IRA.

The maximum you can contribute is based on this equation:

SEP IRA Contribution Limit

Where CR is your contribution rate.

If you’re self-employed, the deadline is tax day (April 17th this year) to open and fund the account.

The employee simply needs to open a Traditional IRA and possibly identify it as a SEP-IRA and the employer can contribute to it. If we’re talking more than self-employment income situations, like a business with five employees that wants to offer a SEP-IRA plan, then there are more rules and more paperwork for the employer. I won’t get into that since that doesn’t apply to me.

My plan is to open up a Vanguard SEP-IRA account and plowing some money (earned through this site) into a Vanguard Target Retirement mutual fund (or another fund on this list) and not messing with it.

{ 4 comments, please add your thoughts now! }

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4 Responses to “Introduction to SEP-IRAs”

  1. Weekly Roundup – 03/03/06

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  2. thc says:

    It must be opened as a SEP-IRA, not just a traditional IRA. And why do you feel the need to pander to Vanguard?

  3. jim says:

    How am I pandering?

  4. IRA Contribution Limit Workaround

    I recently ran across an article on SEP (Simplified Employee Pension) IRAs over at Blueprint and, as I read it, I had an epiphany. The upshot was that if you have any self-employment income (like ad revenue from blogging), you can open a SEP-IRA and th…

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