How to Open a SEP IRA

Sep 13, 2020

Written by:
Ella Vincent

Wall Street is in a bull market. However, self-employed people still have to navigate hard financial issues. They don’t have the luxury of traditional IRAs or restricted stock units. However, when they’re trying to save for retirement, there can be options.

A simplified employee pension(SEP) plan is one way that a self-employed person or an independent contractor like a day trader can still save for retirement. This TradingSim article will explain how a self-employed person like a day trader working from home can open a SEP. This article will also help business owners find the best SEP for them.


What is a SEP IRA?

A simplified employee pension plan is a retirement savings plan that small business owners establish for themselves and their employees.

Howard Pressman is a financial planner with Egan, Berger & Wiener in Vienna, Virginia. He said SEP IRA’s are a great retirement saving option for business owners or independent contractors.

“SEP IRAs and solo 401(k)s are great options for self-employed people and should be considered by anyone wishing to save for their future,” said Pressman.

How can a self-employed person open a SEP IRA?

If a self-employed person wants to open a SEP, they must file paperwork with the IRS. In addition to that paperwork, an entrepreneur can file through Form 5305-SEP. However, there are exceptions. If an employer already has another 401k retirement plan or has leased employees, they may not be able to use that form.

Then, entrepreneurs should consult a financial planner to find the best account provider for them. After consulting a financial planner, business owners must set up a SEP IRA for their employees.

Ryan Repko is a certified financial planner at Ruedi Wealth Management. He maintains that SEPs are simple to set up.

“SEPs are very easy to establish and have virtually no filing requirements, which makes them very attractive for small businesses,” said Repko.

Where can a self-employed person open a SEP?

Greg Wells is vice president of EP Wealth Advisors. He recommends places where people can open SEP IRAs.

“We recommend one of the discount brokerage firms who have no setup fees, no maintenance fees, extremely low trading cost and commission-free options,” Wells says. “[Charles] Schwab, Fidelity and TD Ameritrade are all great low-cost options, and easy to work with if a client is up against the deadline.”

Financial experts give SEP advice

Todd Youngdahl, a certified financial planner, said it’s affordable to set up a SEP.

“In most cases, there is no set-up fee for a SEP IRA and no annual custodial or maintenance fee,” Youngdahl says.

Wayne Bland is a financial planner for Metro Retirement Plan Advisors. He advises employers to set up SEPs with an Employee Identification Number (EIN). Bland says that’s a better option than using their own social security numbers.

“I’ve never seen anyone set up a SEP under their own social security number, it’s always been under an EIN number,” said Bland.

How is a SEP different from a traditional IRA?

In many ways, SEP IRAs are similar to traditional IRAs. With both, IRA holders must wait until they’re 59 1/2 to make tax-free withdrawals. Once an account holder is 72, there are required minimum distributions. These mandatory withdrawals are the same for both types of accounts.

While a traditional IRA may seem more advantageous, a SEP could have more benefits for business owners. Traditional IRAs have lower savings limits than SEPs.

In 2020, self-employed people can contribute either 25% of their income or up to $57,000 a year, whichever is lower. That’s a $1,000 increase from 2019.

Archie Ponce is a certified financial planner and executive vice president of Optima Asset Management. He noted that self-employed people contribute more to SEP IRA’s than traditional IRA’s and stretch IRAs.

SEPs lets self-employed save money

“SEP IRAs provide the self-employed business owner the ability to contribute a potentially larger amount than a traditional or Roth IRA,” said Ponce.

Chad Parks is the founder and CEO of the retirement plan provider Ubiquity Retirement and Savings. He noted that SEPs can help people save with higher saving limits in the accounts.

“If you earn $19,500 and want to put it all into a self-employed 401(k), you could. That would reduce your taxable income to zero,” said Parks.

Jim Hitt is the founder of American IRA. He notes that his company can be a great option for self-employed people saving for retirement.

“We wanted to show people that there’s more than one way to shear a sheep. In other words, there’s more than one way to plan for retirement. And for people who are already independently-minded-such as the self-employed-a SEP can be a great way to store a lot of money for retirement,” said Hitt.

Can employers have SEPs and other IRAs?

While self-employed people can contribute to a SEP, they can choose other retirement plans as well. Dave Cherill is a certified public accountant in New York. He said that there is important criteria to consider when choosing between a SEP IRA and solo 401k.

“The first criteria most people use in choosing between a SEP and a solo 401(k) is how much can I contribute to it?” said Cherill.

Cherill says the solo 401k could be best for self-employed people with more limited income.

 “Normally the solo 401(k) allows for a greater contribution, especially in cases where there is limited self-employed income,” said Cherill.

However, Cherill sees the SEP as a more cost-effective retirement account for the self-employed and small business owners.

“The SEP is simply easier from a cost and administrative perspective,” said Cherill.

Wayne Bland is a financial advisor for Metro Retirement Plan Advisors. He wants his small business clients to get traditional IRA’s if they have more than 10 employees.

“Once they get 10 or more employees they usually start looking at 401(k) plans or other options,” said Bland.

Ferrigno reminds his clients that with SEPs, they can’t make withdrawals from the accounts before they’re 59 1/2 without penalties.

“There’s no ability to take early distributions from the account if you retire prior to 59.5 as some other qualified plans may allow,” said Ferrigno.

What kinds of businesses can open SEP IRAs?

SEP IRA’s are available for many different kinds of small businesses. Brad Ronsley is a certified financial planner. He says that SEPs are a good option for small businesses.

“SEP IRAs are available for a variety of small-business types. They include sole proprietorships, partnerships, limited liability companies, S corporations and C corporations. The plans can be an especially attractive option for a small business with few employees, ” said Ronsley.

How did coronavirus impact SEP IRAs?

As a result of COVID-19, many entrepreneurs have started saving more of their income to weather the economic storm. If they are investing on their own in a volatile market, there is even more uncertainty. However, business owners can start small to open a SEP.

Rick Irace is the head of service and operations for Ascensus’ retirement division. He advocates for any business owner to save whatever they can for retirement.

“Every little bit helps when it comes to saving for retirement,” said Irace.

“Someone who is stretched thin financially can start by simply setting 1% of their pay aside,” added Irace.

While Irace wants investors to save as much as they can, other financial advisors disagree. Michael Kojonen, president of Principal Preservation Services, recommends setting aside any extra money they might have in savings. That may take a priority over funding a SEP.

SEP IRA can help small business owners

“It’s tough, because it depends on your industry,” Kojonen said. “Don’t make any quick decisions about funding it early.”

“An individual should have three to six months of expenses set aside. For my business, I have at least a year of expenses. The pandemic scared everyone into having bigger reserves,” added Kojonen.

What are investment options for SEP IRAs?

SEP IRA funds can be invested in stocks, bonds, ETFs, mutual funds, and other securities.

What are the tax benefits of a SEP?

Ponce notes that there are tax benefits for an employer funding a SEP.

“The tax benefits to the employer are tax-deduction and tax-deferral benefits for the self-employed individual personally,” said Ponce.

Greg Wells is vice president of EP Wealth Advisors. He advocates for SEPs because contributions can be made as often as the account holder wants.

“SEPs are great because they can be opened and funded after the year ends, all the way up until the extension if the person files for an extension,” said Wells.

“It’s also a great tax planning technique as one can wait until their year ends and see where the numbers finish, then decide what to contribute to a SEP,” added Wells.

What are the tax rules of having a SEP IRA?

If a small business owner deducts contributions today, they pay income taxes when they withdraw the money. An employer gets tax deductions for contributions to employees’ accounts. The IRS provides more detailed information about the tax implications of a SEP.

What are the downsides of a SEP IRA?

Even though a SEP IRA may be beneficial to self-employed people, there are setbacks. A SEP IRA doesn’t have a Roth version. That means that a self-employed person can’t choose to currently pay taxes on contributions. Later, they can take tax-free distributions in retirement, like in a Roth IRA.

Like traditional IRAs, there can’t be tax- free withdrawals before self-employed people turn 59. Account holders also have to take required minimum distributions after they turn 72. In addition, there is no way to make up SEP contributions if an account holder starts an account if they’re 50 and over.

Can a SEP help small business owners?

Funding a SEP could be best for small businesses. Only employers can fund a SEP for their workers. Employees can’t fund one on their own.

Niko Finnigan, a partner at Delta Wealth Advisors, believes that the SEP IRA can be beneficial for small business owners.

“The SEP IRA is powerful for closely held businesses because it requires the employer to contribute the same percentage of income for each employee,” said Finnigan.

If an employer wants to add more workers, a SEP may not be best, according to Finnigan.

“The employer would be required to contribute to every employee’s SEP IRA, which can quickly become costly,” said Finnigan.

Paul Ferrigno is a certified financial planner at Ferrigno Financial. He advocates his small business clients to open SEPs.

“I advise my clients to open these plans when they have a small family business or limited number of employees that the employer feels the obligation to help save for retirement,” said Ferrigno.

How do SEPs impact employees?

When a business owner contributes a certain percentage to a SEP, they have to contribute the same amount to an employee’s account. For example, if an employer contributes 5% of their income to a SEP, they have to contribute the same amount for each employee.

Before adding employees to a SEP, they must meet certain criteria. An employee must be 21 and must have earned $600. Ponce also noted that employers can set certain boundaries for SEP eligibility.

“Employers can be less restrictive on the eligibility, but may not set requirements to be more restrictive,” said Ponce.

How do SEPs help employees?

According to Repko, employers can decide how much to contribute to employees’ SEPs.

“The employer contributions are discretionary from year to year, meaning there is no requirement for the company to make contributions each year. The business can choose when to make contributions, which can be a valuable planning tool so the contributions can coincide with profitable years,” said Repko.

While there are expenses with covering employees, those expenses are usually tax-deductible. However, financial expert Wayne Bland notes that if an employee leaves the company, they can take their IRA contributions with them.

“If they quit and go to work for a competitor down the street they take all of those contributions with them,” said Bland.

Even though SEP IRA’s can be expensive for small business owners, employees will stay with a company if there are benefits. Bland notes that the SEP IRA benefits for employers can outweigh the costs.

“Most investment options are available in whatever type of retirement plan you open. But employees love to know that the company is contributing 10, 15 or 25 percent above the gross pay to their retirement account. It reduces the need for the employee to save 10 percent of their gross pay,” said Bland.

Can a SEP IRA save a business money?

A SEP IRA can help businesses save money by helping employees. Ryan Repko, a certified financial planner at Ruedi Wealth Management, said it would help employees.

“The business could save money by establishing a SEP IRA because it would not have to make contributions on behalf of employees who haven’t worked for the company for at least three years,” Repko says.

However, Repko thinks the SEP IRA could be costly for business owners.

“The disadvantage is that any employee who has worked for the company for three years and is at least 21 years of age is going to be covered by the plan, even if they only work part-time,” said Repko.

What are the SEP withdrawal requirements?

If an employer wants to make an early SEP withdrawal, there are penalties. A business owner has to pay income tax on the withdrawn amount. In addition, an employer has to pay a 10% early withdrawal. However, there are exceptions.

If an account holder has certain medical expenses while unemployed, has a disability, or other extenuating circumstances, there may be withdrawal penalty waivers.

Which SEP IRAs are best for self-employed people?

While there are many IRA’s to choose from, these five brokerage accounts are considered the best SEPs.

1. Vanguard

Vanguard is considered one of the best SEP IRA’s for self-employed people. With $4.5 trillion in assets, the company is one of the most valuable retirement management accounts. Finance expert Andrew Chen says Vanguard’s IRA funds are affordable for self-employed people.

“Vanguard funds are best-in-class when it comes to passive index investing for low cost. What makes them stand out is their rock-bottom cost and passive management that allows investors to achieve market-matching returns for zero effort and near-zero cost,” said Chen.

Chen adds that the Vanguard retirement funds have several securities.

Vanguard helps manage risk for SEP IRAs
Vanguard SEP IRAs help account holders manage risk

“The underlying funds that make up the Vanguard target retirement funds hold U.S. stocks, international stocks, U.S. bonds and international bonds. Buy one of these funds and you’re done throughout your investment horizon,” said Chen.

Don Cody is president and CEO of Global Macro Asset Management. He said that because Vanguard is such a large retirement fund corporation, many money managers fund their IRAs with Vanguard.

“Vanguard, because of their size, attracts some of the best active money managers, and their passive or indexed investments track their underlying benchmarks exceptionally accurately,” said Cody.

2. Betterment

In addition to Vanguard, Betterment offers hands-off robo-advising SEP IRA accounts. The company has $13.5 billion in assets. Betterment’s 401k offering, Advised 401K, is a robo-advising retirement plan.

Betterment’s senior communications manager Danielle Shechtman says the company “has enhanced its policies and procedures and made personnel and other changes to ensure compliance with all applicable regulations.” 

Dan Herron is a financial planner with Elemental Wealth Advisors. He said the automatic SEP IRA choices make Betterment a good choice for self-employed people.

“Plus, the technology is so good [and] the onboarding process is so easy, that there [aren’t many] administrative items for the advisor to do. The better these platforms get, the harder it will be for advisors to justify tacking on their fee,” said Herron.

“To me, Betterment stands out from other robo-advisers,” says Kate Dore, the author of the Nashville-based money blog Cashville Skyline. “I like the goals-based investment tools, reasonable annual fee (.25 percent), no minimums, and automatic tax-loss harvesting and rebalancing.”

Soon after opening my account, I started doing an automatic transfer of $100 per month, which I eventually increased over time,” she said. “Four years later, and after substantial market volatility due to COVID-19, I’m still happy to report that the money in my brokerage account has far outperformed where it would be if it were sitting in a traditional savings account.”

Betterment SEP IRA best for hands-off approach to retirement savings

If a self-employed person wants a SEP IRA, Betterment can be a good option. Aaron Schumm is CEO of Vestwell, a fintech company. He says that Betterment’s advising program helps business owners plan for retirement.

“Traditional business-to-consumer fintech and robo-platform providers often pay lip service, saying they will work with advisors, yet in not-so-subtle ways the intent is to take the advisors’ clients,” Schumm says. “It’s important to always understand the core DNA of any partner firm and where their true focus and intent lay,” said Schumm.

Betterment is a robo-advisor for SEP IRAs

Betterment for Advisors general manager Jon Mauney thinks Betterment’s program will help young entrepreneurs.

“Folks ready to get out there and hustle, we’re counting on this being a thing that they’re interested in,” said Mauney.

Theodore van Gerven is founder of Modern Wealth Builders. He advocates self-employed people to use a Betterment IRA that’s easy to set up.

“At the end of the day, for an advisor like me who doesn’t charge on the 401(k) itself, I’d want a platform that is easy to set up and doesn’t require much hands-on from me,” said van Gerven.

3. Fidelity

With Fidelity SEP IRAs, many people are increasing their contributions to these accounts. With this current economic uncertainty, many people are turning to saving in Fidelity IRAs. Katie Taylor is the vice president of thought leadership at Fidelity. She noted that the increased savings rate in SEP IRA’s is encouraging.

“Many working Americans rely on 401(k) accounts to fund their retirement. The fact that people across all age groups are saving at higher levels than what we’ve seen in the past is really encouraging,” said Taylor.

Taylor advises people to start saving in SEP IRAs as soon as possible.

“Start saving as soon as you start your career and take advantage of any matching contributions within a 401(k). Saving early and increasing contributions over time are key,” said Taylor.

Increase in 401k saving helps Fidelity SEP IRAs

With the increase in economic volatility, many employers are funding Fidelity SEP IRAs. Kevin Barry is the president of Workplace Investing at Fidelity Investments. He notes that many business owners are funding IRAs now for their employees.

“While the stock market’s performance in Q2 helped drive workplace retirement account balances higher, employer contributions also played a key role. Nearly 90% of employers continued to offer matching contributions to their employees over the last quarter, despite the unsteady business landscape,” said Barry.

Barry also noted that there was an increase in Fidelity SEP IRA investments during the nationwide quarantine.

“The company match can help drive participation in a workplace savings plan while providing employees with a savings goal to aim for, so we are encouraged to see that the majority of our clients continued to provide this important retirement savings benefit,” said Barry.

“In addition, we saw a growing number of investors make contributions to their IRA, with year-to-date contributions to IRAs increasing more than 20% over the same period last year,” continued Barry.

We generated $2.4 billion in total revenue in the second quarter with the title segment producing $2.2 billion, F&G producing $124 million, and the corporate segment generating $72 million.

Fidelity Q2 2020 earnings rise as more people save in SEP IRAs

As a result of increased SEP IRA contributions, Fidelity had a profitable Q2 2020. Chief financial officer Anthony J. Park spoke about the results.

“Second-quarter net earnings were $309 million, which include net realized gains of $162 million versus net realized gains of $41 million in the second quarter of 2019, primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether those securities were disposed of in the quarter or continued to be held in our investment portfolio. Excluding net realized gains, our total revenue was $2.3 billion as compared with $2.1 billion in the second quarter of 2019,” said Park.

Fidelity says saving for SEP IRA can make big difference later

Meghan Murphy is vice-president of Fidelity Investments. She notes that small savings in SEP IRAs can make a big difference in an account holder’s finances.

“Those small jumps by just 1% or 2% over a 20-year or 30-year career can really make a big difference in the end. The longer that money is in the plan and has time to grow, the better off you are,” said Murphy.

Murphy and Fidelity also advise account holders not to expect to earn too much on SEP IRAs right away.

“Few people get there overnight. Think of planning for retirement as a journey. The key is to save as much as you can now and try to increase savings over time,” wrote Fidelity.

4. E-Trade

In addition to Fidelity, E-Trade offers SEP IRAs. However, because of the current economic volatility, some investors are taking out their SEP IRA funds. Mike Loewengart is the managing Director of Investment Strategy at E-Trade Financial. He noted that young people are especially depleting their IRA funds.

“Young investors have a barrage of financial obligations—whether it’s paying down student debt or a mortgage, saving for retirement, or helping care for their parents,” said Loewengart.

“The recent health crisis has only magnified these issues, forcing some Millennial and Gen Z investors to tap their retirement funds for relief. It’s important for young investors to remember that they have a significant benefit their older counterparts do not—time. Making consistent contributions today, no matter how small, can make an impact over the long term,” added Loewengart.

E-trade SEP IRAs can be way to save money

Despite the “corona-conomy” brought on by the economic slowdown, E-Trade advocates continuing to contribute to their SEP IRAs.

“Many Americans are facing economic hardships amid the coronavirus pandemic and making big financial decisions in times of uncertainty can be difficult. But even though you can do it, doesn’t mean you should.”

“Make sure you’ve exhausted all the ways you can cut back on your expenses, such as refinancing to take advantage of the lower interest rate environment. Though it may seem daunting right now, those cutbacks could add up to help make important payments,” added Loewengart.

5. Ally

Ally Bank is an online bank that offers SEP IRAs to customers. The bank’s CEO Jeffrey Brown spoke about the bank’s early digital-only banking strategy.

“For us, we got a jumpstart maybe on the competition 10 years ago to really build out a digital-only strategy. There have certainly been opportunities and small brick-and-mortar deals that have come in front of Ally, and we’ve really said that doesn’t make sense for our strategy. Our strategy really should continue to be a leader in digital banking,” said Brown.

With low-trading commissions and no account minimums, Ally’s SEP IRA’s are an attractive option for investors. During this volatile time, Ally also is offering assistance to their customers.

How to Invest
Ally helps people invest in SEP IRAs

“At Ally, we recognize there has never been a more critical time to deliver on our promise to ‘do it right’, and we are committed to supporting the people we serve safely and confidently through this crisis,” said Ally CEO Brown.

“We are taking multiple steps to support our customers, communities and all stakeholders to bolster peace of mind and help safeguard their long-term financial well-being. We’ll leverage our strong market position and consumer lending capabilities as we work through the crisis and continue to prioritize long-term value. When we all do our part, we help create stronger and more resilient communities that benefit us all,” added Brown.

6. Ellevest

Ellevest offers SEP IRAs to investors, especially to female investors. Ellevest’s robo-advising format is easy to use. The investment company CEO Sallie Krawcheck thinks it’s critical to have women open SEP IRAs because more women are becoming entrepreneurs.

“If we’re[women] not investing, we’re doing most of the hard work around money (you know, going to work every day, turning in that amazing design, landing the difficult-to-close client, beating our sales projections)….but we’re only getting about half the reward. We’re depriving ourselves of the ability to take on more risks in our career, to ‘play loose,’ to have more fun in what we do, to do more in our careers, if we don’t have a financial cushion built up,” wrote Krawcheck on Ellevest’s blog.

Krawcheck also wants Ellevest to inspire female investors to save more of their funds in SEP IRAs.

“[Women] tend to leave more than 70% of our wealth in cash as opposed to investing it. For the typical professional woman, that can cost her hundreds of thousands — for some women, millions — of dollars over the course of their lives,” said Krawcheck.

Krawcheck also thinks it’s key for young investors to start saving in SEP IRA’s as soon as possible to accumulate wealth.

“A dollar invested in your 20s is worth more than a dollar invested in your 30s is worth more than a dollar invested in your 40s is worth much more than in your 50s, 60s or 70s,” said Krawcheck. 

Ellevest’s IRA is another option for investors that want to save for retirement.

SEP IRA’s can be affordable option for business owners

While saving for retirement can be daunting, there are options for the self-employed. TradingSim can help self-employed people like day traders practice trading stocks that are available in the best simplified employment pension IRAs. These accounts can help investors have a stable retirement.

Tags: ally bank

amazon stock

How to Set Up a Backdoor Roth IRA

For people with high incomes, Roth IRA’s may be inaccessible. However, there is another option- a backdoor Roth IRA . This TradingSim article will help readers understand how to use backdoor Roth...

Traditional IRA – 7 Things You Need to Know

Traditional IRA is a basic savings plan that was created by the Congress. It started with establishing the Employee Retirement income Security Act of 1974 (ERISA). The IRA came into effect on...

How an Investor Can Benefit from an Inherited IRA

When a person passes away, there are many issues for their surviving relatives to deal with- especially financial issues. When a person inherits an individual retirement account (IRA), there are many...