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Introduction to SEP-IRAs

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:

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 [3] (or another fund on this list [4]) and not messing with it.