Retirement Options for Self Employed Part 1 - SEP IRA

Being self employed is about more than just sticking it to the man. You are your own boss. You have the freedom to take control of your business, make the decisions, and ensure the safety of your own future. This article, spanning several parts, will give you the down and dirty details on each of the options that you have for retirement.

SEP-IRA

Short for Simplified Employee Pension Individual Retirement Account, a SEP-IRA is a simple alternative that is treated much like a regular IRA, but has advantages over some of the other options.

Requirements

Must be at least 21 years old
Must have worked for the same company (or yourself) for the past three out of five years
Must have made at least $450 in wages the previous year

Setup and Management

It really is simple! - a SEP is easy to setup and manage, usually through your bank or brokerage firm.
Fees and costs - SEPs are usually free to setup and have little or no administraion fees.
Deadline - You can start (and fund) a SEP up to the date that you have to pay your taxes, including extensions.

Contributions

Limits - Each year you can contribute the lesser of $45,000 or 20% of your income. If you are employed under your own corporation then you can contribute up to 25%.
Tax Deductible - Your contributions are tax deductible so they will lower the amount of taxes that you owe.
Deadline - You can contribute to your SEP up until the day that you are required to pay your taxes.
Withdrawal - After the age of 59.5 your withdrawal, or distribution, of your SEP will be taxed as regular income, but will not incur any other fees or penalties.

Early Withdrawal

If you withdraw from your SEP before you are 59.5 you will be subject to a 10% early-distribution fee plus the amount that you will be required to pay in income taxes. There are, however, a few exceptions to this early-distribution fee:

Disability - If you have a proven mental or physical disability then you will not be penalized for your withdrawal.
Medical Insurance - If you have lost your job or if you have been drawing unemployment for at least 12 consecutive weeks then you can withdraw, penalty-free, from your SEP to pay for medical insurance as long as you receive the funds within 60 days of starting a new job.
Non-reimbursed Medical Bills - If you have medical bills that are not going to be reimbursed and they are greater than 7.5% of your adjusted gross income (AGI) then you will not incur an early-distribution fee.
Higher Education - Tuition, fees, books, and other supplies that are required for you or your dependents to attend a college, university, or vocational school are exempt from the early-distribution fee.
Buying Your First Home - You are allowed to withdraw up to $10,000 ($20,000 if you are married) to go towards the acquisition costs (like the down payment) of buying or building your first home. You are also allowed to do this for you or your spouse’s children, grandchildren, or other ancestor.