The pros and cons of SEP accounts in today’s volatile market

Today’s seesaw market may worry investors who save for retirement. Watching the value of your account rise and fall can make you anxious about the simplified employee pension (SEP) plan. However, even during periods of market volatility, your SEP has more advantages than disadvantages.

Key points

  • Simplified Employee Pension (SEP) is a type of personal retirement account that employers or self-employed people can set up.
  • SEP IRA aims to help company employees save for retirement.
  • SEPs can also be established by self-employed individuals for their own benefit.
  • The maximum total contribution limit is the lesser of 25% of the employee’s salary or US$58,000 in 2021 and US$61,000 in 2022.

Save more

Simplified Employee Pension (SEP) is a type of personal retirement account (IRA) that employers or self-employed persons can establish. SEP IRA is designed to help company employees save for retirement, or SEP can be set up by self-employed owners for their own benefit.

However, the contributions are not funded by the employee, as in the case of a 401(k), but the SEP IRA is funded by the employer. Contributions are provided directly to the employee’s IRA.

SEP is a good retirement savings tool. However, the rules limit the amount that can be contributed. The maximum contribution limits for 2021 and 2022 are:

  1. 25% of employee compensation (maximum of USD 290,000 in 2021 and USD 305,000 in 2022) or
  2. USD 58,000 in 2021 and USD 61,000 in 2022

account setting

SEP accounts are usually set up by self-employed individuals or small businesses. The maximum contribution cannot exceed the minimum of the two values. Therefore, these two values ​​should be calculated to determine the limit.

If the SEP is established as an IRA, individuals can usually make personal contributions up to the traditional IRA limit of US$6,000 in 2021 and 2022, and those over 50 can contribute an additional US$1,000 per year.

The SEP account is usually the first choice for self-employed self-employed individuals because it allows them to pay up to $58,000 or $61,000 before paying taxes to their retirement account in 2021 or 2022, while also deducting business expenses. Sole proprietors need to calculate deductions specially. In general, each SEP program has its own rules, depending on the settings and contributors.

Employers must contribute the same percentage to each employee’s account, including their account as the owner. Sole proprietors may decide to choose a separate 401(k) as an alternative to SEP.

A separate 401(k) is similar to a SEP account, but it has its own rules and regulations. A separate 401(k) may allow up to $19,500 in deferred wage contributions in 2021 (increased to $20,500 by 2022); however, a separate 401(k) is subject to its own special maximum contribution calculation.

Tax-free accumulation

The tax benefits of SEP are basically the same as those of 401k or other pre-tax retirement savings tools. All income accumulates and there is no need to pay income tax immediately. Savings are compounded at a relatively high rate, and even after paying taxes on withdrawals in the future, they can provide you with more money after retirement.

SEP contributions can also be deducted for the contributor, but the deduction may vary depending on the situation.

Employee Benefits

Most small businesses provide few pension benefits. Benefits provided by employers who make profit-sharing contributions on behalf of employees can help attract and retain high-quality employees at a lower cost than increased wages.

Change investment without tax liability

SEP is a tool you can use to proactively manage your investment portfolio. All transactions have no tax consequences. You can make a decision based on total returns and market conditions.

Many SEP providers offer a wide range of investment options, such as exchange-traded funds (ETFs), which contain a basket of stocks to help diversify the risks associated with investing in the stock market.

Dollar cost averaging

Mutual funds are securities investment portfolios managed by investment managers and are common investment tools in standard essential patent accounts. Depositors can choose from multiple mutual funds and deposit their donations on a regular basis.

This passive investment strategy is the main advantage in the downward phase of the volatile market, because the dollar cost will occur automatically on average. Each deposit buys more fund shares when the market drops and fewer shares when the market rises.

What are the advantages of SEP accounts?

Some of the advantages of SEP accounts include reduced taxable income, tax deferred compound interest, high contribution limits, and practical ways to save for retirement.

What is the contribution limit for SEP accounts?

The contribution limit for the SEP account is 25% of the employee’s income in 2021 or $58,000, whichever is less. In 2020, this amount will be 25% of the employee’s income or $61,000, whichever is less.

Can I contribute to the SEP account?

As an employee, you cannot contribute to a SEP account. Only employers can contribute to the SEP account, and they determine the amount of the contribution. The employer can also decide not to contribute at all.

Bottom line

The advantages of SEP retirement accounts vary by setting. Finally, the only big scam for investors is not to participate when offering SEP.

The SEP account has a big difference between the contributions of sole proprietors and employers to employees. Like any retirement plan offered by an employer, a SEP account can increase income beyond the standard salary. In fact, they are usually set as additional employee benefits.

Employees can take advantage of all the advantages with minimal account management. If market volatility causes the market to fall, switch to conservative investments, such as bonds. If the market starts to rise, transfer the assets back to stocks. If you don’t want to be disturbed, please choose a no-load asset allocation mutual fund with retirement goals as the goal, and let professional portfolio managers make market timing decisions.

Whether you are an active investor or a passive investor, your retirement savings will be much more than someone who does nothing.

For self-employed individuals, SEP accounts provide the same advantages as employees. The sole proprietor’s SEP account can be an excellent tool for personal investment and savings, and can choose to deduct business expenses. The contribution of the sole proprietor SEP may be subject to its own limitations, so additional research and planning may be required.


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