How to Start a SEP IRA

Any small company owner or self-employed individual can establish a Simplified Employee Pension (SEP) IRA (Individual Retirement Account). You can deduct any contributions you make to the plan from your taxes and these contributions vest immediately. Follow these steps to institute the plan.

Difficulty: Moderately Easy

Instructions

1. Find out how much the company you work for is going to contribute to your IRA. If you are running your own company you can choose how much you want to contribute on behalf of yourself. The maximum allowed by law, without incurring a excessive tax is 25 percent of the employees compensation or $42,000 whichever is less. If you are running your own company and are not incorporated, it is 20 percent.

2. Contribute a portion of your salary to your retirement account. If you are self employed you can contribute $3000 and an extra $500 if you are over 50.

3. Monitor your account carefully; your employer can change the amount they contribute every year; make sure you know how much they are contributing, so that you can offset any decrease with your person retirement account.

4. Leave your account alone until you are of retirement age; there are penalties associated with withdrawing from your account early. Any income removed before one is 59 1/2 is subject to standard income tax rates and an additional 10 percent penalty for early withdrawal.