What is a SEP IRA?

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SEP IRA written on a piggy bank
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A SEP IRA is a great tool that self-employed individuals and small business owners can use to save for retirement. In this article, we’ll take a look at what a SEP IRA really is, how much you can contribute to it each year and where you can go to get yours started.

Introducing the SEP IRA

If you’re self-employed, you don’t have access to a company-sponsored retirement plan like a 401(k). But that’s OK. With a SEP, you can easily get the job of saving for your future done!

What is a SEP IRA?

SEP stands for simplified employee pension and the IRA part stands for individual retirement account. You may already be familiar with the acronym for the latter, but maybe not for the former.

Here’s the key thing to know: SEPs work like a traditional IRA or a 401(k), with a current year tax deduction, but withdrawals are taxed at retirement.

“The SEP is great for the self-employed. It requires almost no paperwork to get started and is incredibly flexible,” money expert Clark Howard says. “It is the easiest way for someone who has a side gig or works for themselves full-time to reduce current tax and to save big money towards retirement.”

What are the SEP IRA contribution limits for 2019?

Even though a SEP is an individual retirement account, your contributions aren’t capped at $6,000 or $7,000 — depending on age — like they are with traditional IRAs and Roth IRAs.

In fact, you can contribute almost 10 times that amount to a SEP on an annual basis! The SEP IRA contribution limit for 2019 is $56,000.

But here’s the really nice thing: You don’t have to contribute every year. So if you have a year when you do great, you can contribute the maximum. But if you have a year that you’re barely scraping by, you don’t have to contribute a penny.

“That can be really helpful during the feast or famine years when you’re launching a business,” Clark notes.

RELATED: How to maximize your retirement savings in 2019

Where can you set up a SEP IRA?

All the low-cost investment companies that Clark likes offer SEPs. Here’s a list of links to get you started:

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Provider Set-up fees Account minimum Annual maintenance fees
Vanguard N/A N/A  $20 for balances under $10,000
Fidelity N/A N/A N/A
Charles Schwab N/A N/A N/A

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