Saving for Your Retirement: The SEP IRA

The SEP IRA (Simplified Employee Pension) has been around for many years, but has become less popular over time with child care providers. Here are its main components:

Eligiblity: There are no income eligibility requirements for a SEP IRA. Any self-employed child care provider may set up one. You must show a profit for your business in the year you make a contribution.

Contribution limits: You may contribute up to 18.58% of your business profit to a SEP IRA for yourself each year. For example, if your profit were $10,000, your maximum contribution would be $1,858.

Deadlines: You can set up and contribute to a SEP IRA up to April 15 for the previous tax year, or up to October 15 if you file a tax extension.

Tax deductability: Contributions to a SEP IRA are tax deductible. When you withdraw money after age 59 1/2, you will owe income tax on both your contributions and your earnings on your investment.

Employees: If you set up a SEP IRA for yourself and hire employees, you may have to make a retirement contribution to your employees’ SEP IRA. This will be required if your employee is at least age 21; has worked for you in three of the past five years; and has earned at least $500 in the current year.

Because of the potential of having to make retirement contributions to an employee, many providers choose a different IRA plan than the  SEP IRA. The SIMPLE IRA also has rules that may require contributions to an employee’s IRA, although the rules are different than a SEP IRA.

SEP IRA vs. SIMPLE IRA

Comparing these two IRA options, the SIMPLE IRA comes out ahead. On a $20,000 profit, you could contribute up to $12,500 to a SIMPLE IRA, but only $3,716 to a SEP IRA. Since they are both tax deductible, and both have similar rules about potential contributions to an employee’s IRA, it makes more sense to set up a SIMPLE IRA. The one drawback to a SIMPLE IRA is that it must be set up at least 90 days before the end of the year.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.entrepreneur.com/article/371020

I’ve written much more about IRAs in my book: Family Child Care Money Management and Retirement Guide.