07 April 2006

More on SEP-IRAs

Earlier this week, I blogged on one blogger's SEP-IRA in order to shield self-employment income generated by his blog. The IRS webpage has several resources on setting up and maintaining a SEP-IRA.

The big pluses of SEP-IRAs are the high contribution limits (25% of compensation or $42,000) and lack of broad regulation (similar to 401(k) plans). The downsides are that contributions are limited to employer-only and everyone must get the same percentage if there is more than one employee. Also, SEP-IRA contributions vest immediately, unlike many other plans that allow step-vesting.

The SEP-IRA is available for businesses of all sizes, but is aimed particularly at small businesses. If you are self-employed, I see no reason not to use one to lower employment and income taxes.


Joe Elrod said...

Got a question. IRS Publication 560 indicates that a person over age 50 can make a catch up contribution of up to $4000 for 2005. But the comment does not appear specifically in the discussion of SEP-IRA's but in the general comments on what is new for 2005. Do you or anyone else know if you can make a $4000 catch up contribution to a SEP-IRA for 2005? Or does this just apply to some other plan?

Kirk said...

Remember the disclaimer on the site. Always discuss a particular situation with a different tax professional you trust or the company that maintains your IRA.

That said, SEP-IRAs are simply IRAs that your employer can contribute to as well. From your point of view, you can make a contribution to the IRA account up to the statutory limits, which were $4,000 for those over age 50 (an extra $1,000).

For more information, see Publication 590 (IRAs), which I can't link to :)