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You don’t have to work for a big corporation to enjoy the same type of tax benefits that many corporate employees experience with their company retirement plans. If you’re self-employed, you can open a Simplified Employee Pension Plan (SEP) that may allow you to contribute thousands of dollars each year to a tax-deferred account.

SEPs are similar to 401(k) and other corporate retirement plans in that both are funded with money you make before taxes, or pre-tax contributions. Investments within both plans grow tax-deferred, and withdrawals in retirement are generally taxed at your ordinary income rate in the year of the withdrawal. A SEP plan can be established and maintained each year with less cost and administrative effort on your part.

If you’re self-employed, here’s some info you might want to know about these popular plans:

  • You may contribute up to 25%1 of your compensation2 or $56,000 (whichever is less) for 2019 and $57,000 for 2020.
  • You can contribute to a SEP every year you are self-employed and have earned income, regardless of your age. 
  • You can adjust your contribution amount each year as the situation warrants.
  • You have until your business’s tax filing date plus extensions to set up and fund a SEP.3
  • You must start taking required minimum distributions (RMDs)  in the year you turn 72. However, if you turned 70 ½ in 2019, you must take RMDs in 2019, 2020 and beyond. (See: Ready for Age 72? Make the Most of Required Distributions)

If you take a distribution before age 59 ½, you would normally be subject to income taxes and a 10% early distribution penalty, although certain exceptions apply. The 10% penalty may not be imposed if the following conditions apply:

  • You are totally and permanently disabled.
  • You (and your spouse) are a first-time home buyer(s), in which case you can use up to $10,000 from your SEP to make a down payment on a home.
  • You are using the distribution to cover unreimbursed medical expenses.
  • You use the money to pay health insurance premiums while you’re unemployed.
  • You use the money for qualified higher education expenses.
  • You have a new baby or adopt a child. You may withdraw up to $5,000 from your IRA without a penalty. The withdrawal must be made within one year after the birth or adoption date. The distribution may be treated as a rollover and may be resubmitted to an eligible retirement plan or IRA.* (See: SECURE Act alters retirement investing options for individuals and businesses)
  • For more information, see Exceptions to Tax on Early Distributions

Although you would not pay a penalty on money withdrawn after 59 ½ (or if you qualify for an early distribution exception), you would owe taxes on all distribution at your ordinary income rate for the current tax year.

Other SEP guidelines

If you hire any employees, some other requirements would apply. For instance:

  • Contributions are only made by the employer, no employee contributions are allowed.
  • If you have any employees who are at least age 21 and worked for you at any time in three out of the prior five years they must be included in the SEP plan.
  • If you contribute on your own behalf, you must also contribute on behalf of all eligible employees.
  • Employees are always 100% vested in (or, have ownership of) all SEP-IRA contributions.

How to set up a SEP for your business

Establishing a SEP for your business starts with maintaining a plan document. The IRS provides a prototype document called the  5305-SEP, Simplified Employee Pension form.  That is a matter that you may choose to handle through your tax advisor or on your own. (For more details, see IRS article: How Do I Establish a SEP?)

Once your business has established the SEP Plan, you would be able to open a SEP IRA account with a qualified financial institution to receive your contributions and provide investment choices, such as mutual funds, in which to invest your funds.

* This exemption shall apply to distributions made after December 31, 2019.

Information presented is for informational purposes only, and is not intended to provide accounting, legal or tax advice. Please consult your tax or legal advisor regarding such matters. Thrivent employees and their representatives cannot provide legal or tax advice.

Self Employed owners who file Schedule C are limited to 20% of net earned income

For Schedule C filer, it would be net earned income; for Schedule C or Sub S Corporation filer, it would be W-2 income.

3, Retirement Plans FAQs regarding SEPS contributions


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