As is often the case these days, 401ks “at the office” become a little out of sync when companies take away matching contributions leaving little control over your accumulation as decisions are made on the account without your participation, Restrictions placed on your money seem a little meaningless. Perhaps it's time to take some control of your own.
You
can create your own tax advantaged “SEP” and bring control back to your own
decisionmaking. Consider the following for a background guideline.
A
SEP IRA is a type of traditional IRA for self-employed individuals or small
business owners. (SEP stands for Simplified Employee Pension.) Any business
owner with one or more employees, or anyone with freelance income, can open a
SEP IRA. Contributions, which are tax-deductible for the business or
individual, go into a traditional IRA held in the employee's name. Employees of
the business cannot contribute - the employer does. Like a traditional IRA, the
money in a SEP IRA is not taxable until withdrawal.
One
of the key advantages of a SEP IRA over a traditional
or Roth IRA
is the elevated contribution limit. For 2010, business owners can contribute up
to 25% of income or $49,000, whichever is less.
An
employee is eligible to participate in a SEP IRA if he or she is at least 21
years old and has worked for the company in three of the last five years, and
received at least $550 in compensation during the year.
As an employer, you don't have to fund contributions every year. But when you do choose to make contributions, you must contribute not only to your own SEP IRA, but the SEP IRA of every eligible employee.
A
SEP IRA may be your best bet if you are a one-person show and plan to keep it
that way. You can open one at virtually any bank, mutual fund company or
brokerage firm, and pay low or no annual account fees. Your contribution limit
is based on a simple formula: You can put away as much as 25% of your net
income, up to a cap that increases periodically to keep pace with inflation. In
2010, the cap is $49,000.
If
you're a small business owner, SEP IRAs are appealing because they are easy and
inexpensive to set up, and contributions are tax deductible. A SEP IRA's
funding flexibility is also a draw. If you have a tough year financially, you
can choose not to contribute to the plan. If you have a great year, you can
fund the plan with a larger contribution than you'd originally intended.
