SEP stands for simplified employee pension; the second for individual retirement account.

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Translation: It’s a retirement account for business owners and self-employed individuals.

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Whom is a SEP IRA best for?

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A SEP IRA is a basic retirement account, much like a traditional IRA. SEP IRA contributions are tax-deductible, and investments grow tax-deferred until retirement, when distributions are taxed as income.

Because of the rule requiring equal contributions as a percentage of compensation for all employees, a SEP IRA is generally best for self-employed people or small-business owners with few or no employees.

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What are the contribution limits?

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This is where the SEP IRA stands apart from a traditional IRA. A regular IRA allows you to put away $5,500 in 2017 ($6,500 if you’re 50 or older). With a SEP IRA, you could stockpile nearly 10 times that amount.

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The annual contributions you make to a SEP IRA cannot exceed the lesser of:

• 25% of compensation

• $54,000 for 2017

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The first limit, 25% of compensation, is also the limit for how much you can contribute for each eligible employee. The amount of compensation you can use to calculate the 25% limit is also limited, to $270,000 in 2017. There is no catch-up contribution allowance at age 50 for SEP IRAs.

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You can combine a SEP IRA with a traditional or Roth IRA. If you’re an employee who is covered by a SEP IRA, employer contributions don’t reduce the amount you can contribute to an IRA for yourself, but the amount of your traditional IRA contribution that you can deduct may be reduced at certain higher income levels, due to the combination of both plans.

In short SEP’s are a great way to enhance and grow your retirement account while reducing your taxes.  Most home inspectors are good candidates for starting an SEP account.

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