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Retirement Basics
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SEP IRAs good for the self-employed

Self-employed workers wishing to save hefty amounts for retirement may wish to consider a Simplified Employee Pension Plan, or SEP IRA.

Designed for sole proprietors and small businesses, the SEP IRA boasts funding limits that are more generous than the traditional or Roth IRA. Plus, they're flexible.

Contribution limits for the SEP IRA max out at 25 percent of compensation, not exceeding $49,000. Earnings grow tax-deferred, meaning the IRS doesn't get paid until assets are withdrawn.

So if you stash the maximum $49,000 and earn 8 percent annually, you'd have nearly $710,000 saved up in 10 years. That kind of earning potential makes the SEP IRA a smart choice, says Certified Financial Planner Dee Lee, author of "Let's Talk Money."

Even Lee stashes her own retirement savings in a SEP IRA.

SEP IRAs at a glance
  • Perfect for self-employed individuals.
  • Funding up to 25 percent of compensation or $49,000.
  • Earnings grow tax-deferred until withdrawn.
  • Withdrawals before age 59½ are generally subject to tax penalty. Distributions must begin by age 70½.

"What I like best is there is no IRS annual reporting required for the SEP IRA like there is with a 401(k)," she says.

If you contribute to a SEP for yourself and you have employees, then you must include them in the plan. However, contributions are deductible as a business expense, and there are no requirements to make substantial contributions. Employees are fully vested from day one.

Meanwhile, employees at businesses that offer a SEP cannot save their own earnings in the accounts. Instead, they can fund a traditional or deductible IRA outside of work.

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