How to Manage Your Own SEP
An SEP, or Simplified Employee Pension plan, is a retirement plan designed to allow employers to make retirement contributions for their employees. Under an SEP plan, each employee has their own personal Individual Retirement Account, into which employer contributions are made. As the Internal Revenue Service requires that employers contributing for themselves must also contribute for employees, SEP plans are popular with sole proprietors, who can thereby make contributions only for themselves.
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Instructions
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Evaluate your management options. A SEP cannot exist without a financial services firm to physically open the account, but you have options over how you can manage your account. If you have investment knowledge, you may want to manage your own account through an online broker. Although traditionally online firms were accessible strictly through the internet, most have local offices now, so you can open your account either way. If you are not comfortable managing your own account, consider working with a full-service broker. Your costs will be higher, but you will not have to be as actively involved in the day-to-day management of your account.
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Define your investment objectives and risk tolerance. Once you have physically opened your SEP account, you must determine what your goals are as an investor. Even if you are working with a financial adviser who can offer assistance, ultimately you must choose whether you want your investments to generate income, growth in value, or a combination of the two. Be honest with yourself about your ability to handle fluctuations in the value of your account.
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Select appropriate investments. If you are seeking long-term growth, you will most likely want to own more stocks in your portfolio, although the types of stocks you choose should be measured against your risk tolerance. For example, if you are comfortable with a wildly fluctuating account value, you can consider stocks which have a higher risk-reward profile, such as emerging market or bio-technology stocks. If you want growth in your account but are a bit risk-averse, you might want to tilt your stock selection towards larger, well-established companies, known as "blue chips." Similarly, if you are seeking income, your portfolio should most likely hold more bonds and other income-generating investments, such as Treasury notes, as opposed to stocks, but if you are risk-tolerant you can own more aggressive bonds, such as high-yield securities.
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Watch contribution limits. For 2010, your contributions to an employee account cannot be more than 25 percent of an employee's compensation or $49,000, whichever is less. For your own account, you cannot contribute more than 20 percent of your net self-employment income or $49,000, again whichever is less.
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Tips & Warnings
Be wary of tax ramifications and other penalties. As with any IRA account, you cannot withdraw from your SEP-IRA until you are 59 1/2 years of age without incurring a 10 percent penalty. Any distributions you take from your SEP, at any age, will also be taxed at ordinary income rates.
References
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