Last week, we gave you a broad overview of your options for retirement accounts for those of you who are self-employed.  Starting this week, we want to go a little deeper into each of the plans.  

This week, we will be examining the SEP account, which is one of the most popular plans of all for the self-employed. 

What exactly is an SEP?
The SEP (Simplified Employee Pension) plan is an account that you can use to accumulate money tax-free until retirement.  In essence, you contribute to this account each year and interest (i.e. earnings) accumulates without the federal government touching it...until you retire.  But, at that point, the chances are that it will be taxed at a lower interest rate...thus saving you money!

When would the SEP be a good choice for me as a business owner?
If you are self-employed and have no employees of your own, then SEP is a good option for you.  You can actually be a sole proprietorship, partnership or LLC.  If you do have employees, but can't contribute to an SEP for them for whatever reason, then you should select a different type of plan (see the next few issues for more ideas).  This is not a good plan for you if you make your money off of investment income.

How do I set an SEP up?
A brokerage service (Charles Schwab, Fidelity, etc.) , a bank, a mutual fund company...or even an insurance company...can set one up for you!  It is really very easy to set one up...it is similar to opening any other type of account (like a checking account, etc.).

What types of investments can I apply the contribution to?  
Once you put the cash in the account, you can buy mutual funds, stocks, bonds, CDs, etc.  The range of choices is usually limited only by the company that you use to set up the account.

How much can I put in each year?
As a self-employed person, you can contribute up to 13.04% of your business' earned income up to $24,000 (whichever is lower), into this account every year.  Notice that I said 13.04%...not 15% like it says in the tax code.  The "15%" figure is based on net earned income AFTER you have taken out the SEP deduction.  So, ignore it!  Also, notice that I said "earned income."  This means that you must contribute from profit from your work...not interest income, capital gains, etc. 

Do I have to contribute towards my employees as well?
Obviously, you can contribute to your own account, as described above.  However, if you have employees of your own, you must contribute to all employees who meet all of the following criteria:

• are over 20 years old 

• have been with the company at least 3 out of the past 5 years 

• make over $400 per year.

So, you have employees, but you can't contribute, select another type of plan.