Retirement Planning: Do You Know What A SEP IRA Is?

By Rebecca Reisner
This story originally appeared on LearnVest.

Retirement can conjure up visions of pursuing a passion, hanging with the grandkids or taking epic vacations.
But the ability to do just as you please requires financial freedom—in other words, a sizable nest egg.
Clients regularly ask me about potential savings vehicles such as 401(k)s and IRAs—but people also hear about other retirement accounts and wonder whether they’re missing out on potential financial benefits.
That’s why I sometimes get asked: What’s a SEP IRA?

Why So Many People Ask This Question
The SEP IRA isn’t a well-known option. And that’s largely because it usually makes sense only for a subset of retirement savers, namely, small business owners and self-employed people with non-W-2 income.
For the right candidates, though, there’s a powerful case to make for SEP IRAs, as long as you understand the fine print.


What I Tell Them 
Administrative costs for SEP IRAs tend to be much lower than those of traditional employee retirement plans. If you own a business, you’d likely have your CPA handle filling out the necessary 5305-SEP IRS form and other paperwork; no third-party administrator is needed.
But the drawbacks of SEP IRAs can be equally striking. First and foremost, if you’re an employer, contributions for workers come out of your own pocket—not theirs. Employees can’t contribute their money to SEP IRAs, so it’s essentially your gift.

The Bottom Line
A SEP IRA tends to cater to individuals who are self-employed or run a small business and is most ideal for someone who has no employees or very few employees. It is also an especially attractive retirement savings option for high earners who have cash left over after paying their bills and can put aside a significant amount of pretax income.