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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.�
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Pay
attention if: |
You
are self-employed. |
The
Plain� Summary
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The
SEP account lets you invest up to $24,000 per year for
retirement.� |
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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:
So,
you have employees, but you can't contribute, select
another type of plan.
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