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Top 5 Things Retired Military Business Owners Should Know About a SEP IRA

Retirement Funding

As a small business owner you may be looking for avenues to provide your employees and/or yourself with options to contribute to a nest egg. Offering to help your employees when it comes to retirement options can benefit your business in more than one way. If you're seeking alternative options to a formal defined contribution qualified plan, a SEP IRA (simplified employed pension individual retirement account) may be the answer. 

With low administrative fees, flexibility, and lower costs, here are five other facts employers (and self-employed retired military officers) need to know about SEP IRAs:

1. SEP IRAs Differ From Traditional and Roth IRAs

As distinct from a Traditional IRA and Roth IRA’s, a SEP IRA has a twist. SEP IRAs are tied to the company. The business owner, who can also be a self-employed person, sets up the account and makes all contributions to his or her own account and the accounts of the eligible employees. 

The employer gets the tax break, and the employee is likewise not taxed on SEP IRA contributions. The tax liability begins when the funds are withdrawn.

2. Contribution Limits Are Vastly Higher Than Other IRAs

The deadline for making tax-deductible IRA contributions for a given tax year is usually April 15. Regular and Roth IRAs have a contribution limit of $5,500 (for 2018 — also add $1,000 for catch-up contributions if age 50 or older). 

The SEP IRA, on the other hand, has a contribution limit for the 2018 tax year of $55,000, or 25 percent of the employee’s income, whichever is lesser (calculations are slightly different for owners of "pass-through" entities). There are no minimum contributions required, though.

The SEP IRA can be opened and funded after the tax year ends up through any tax filing extension. SEP IRAs provide a flexible way for employers to look at the end-of-year company financial state and make SEP IRA contributions accordingly.

3. SEP IRA Eligibility Requirements Are Different From Other IRAs

An “eligible employee” is both the business owner or a qualified employee who:

  • Is age 21 or older.
  • Has worked for the employer in at least three of the previous five years.
  • Has earned at least $600 in the eligibility years (from 2015 through 2018).

Younger employees can also be included when they have worked for shorter periods of time in the years before they turn 21. Also, be aware that if you are a business owner and make a contribution to your SEP IRA account, you must also make the same percentage contribution to your eligible employees’ accounts.

3. You Can Exclude Certain Employees From Sep IRA Contributions

Those employees include:

  1. Those covered by a union agreement.
  2. Employees whose retirement benefits are a result of collective bargaining.
  3. Nonresident alien workers who receive no compensation from the employer.

Employees are immediately 100 percent vested in their SEP IRA accounts. Whatever the employer contributes belongs to the employee. The funds can be transferred directly, or rolled over into other IRAs.

4. You Must Begin Withdrawing From Your Sep IRA at Age 70.5

Just like Traditioinal IRAs, you must begin distributing its funds when you reach age 70.5. Those withdrawals will be subject to ordinary income taxes. You can invest your SEP funds in securities like stocks, bonds and mutual funds. However, unlike a Traditional IRA, if you keep working past age 70.5, you can continue to make SEP IRA contributions.

Early withdrawals (before age 59.5) are subject to a 10 percent tax penalty, unless the withdrawal was for medical expenses of more than 10 percent of gross income. Also, first-time home buyers can withdraw up to $10,000 from their SEP IRA.

5. SEP IRAs Can Be Just the Thing for Many Retired Military Business Owners

If you have a small family business or a limited number of employees, the SEP IRA has many of the features of a regular IRA, and the contributions are subtracted from your taxed income. The biggest advantage is the large amounts you can set aside for retirement.  When combined with your military pension, you could be set for your ultimate retirment.

Setting up a SEP IRA is simple and inexpensive. You can open a SEP IRA at any bank, mutual fund company or brokerage firm with low (or no) annual account fees. If you are looking for an incentive to lure and retain good employees, a SEP IRA, where the employee contributes nothing, is a definite plus.


If you found this article interesting, you might enjoy the following blog posts as well:

Retirement Plan Options for Self-Employed Retired Military Officers


4 Self employment financial Truths Retiring Military Officers need to Know


Retired Military Business Owner? What type of business insurance do you need?


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