A SEP IRA essentially works like a traditional IRA, with the only difference being that the employer makes the payments for the investments. This is very useful for workers because it means they can contribute their own cash income to other investments like their own home. At the same time, employers can provide incentives for their jobs. A lot of workers are worried about having sufficient retirement savings, so employers who offer a solution to this will no doubt be very popular.
While the SEP IRA is separate type of IRA from the traditional IRA, the restrictions for funding are the same. A company’s funding of an IRA cannot go beyond the same limit that exists for the traditional IRA, even if they have an employee who earns a high income. These limits were introduced by the government to ensure the system they set up fulfils its purpose. Their aim is to encourage more people to prepare their own retirement provisions by making IRA investments affordable for average income earners, thus reducing the overall demand for state pension benefits. The investment will nonetheless grow a substantial amount of capital over time, allowing for a comfortable retirement.
This employer based IRA plan basically has the same rules as the traditional IRA regarding investment options for funds, as well as the process and timing of withdrawals. In many cases mutual funds are used to invest employer funds, since they are one of the safest investments available by spreading the risk across a range of stocks. You also have the option of directly buying a stock you think will make a good investment, which can belong to your employer or be another stock of your choice. Real estate investment is another possibility, although you have to wait a long time before you have gathered a sufficient amount of money to make an initial down payment.
The point of having a SEP IRA is to effectively make a retirement investment for yourself, which is why strict penalties for withdrawals are in place. This applies to any IRA plan, which also serve the same basic purpose. There are however a few exceptions for people who need to cover urgent financial expenses, often for a close family member. For example, you can withdraw money for medical bills, education expenses or the down payment for your first home without incurring any penalties.
The SEP IRA only allows the employer to contribute funds to the investment, and no other sources of funds are permitted, including borrowed money or payments from the individual. This is a strict restriction of the SEP IRA plan, but it’s not really a setback for the individual because they can just open up another IRA plan which will let them fund the IRA with these other sources. A standard IRA will allow you to fund the investment from your own income up to an annual limit. You can also invest borrowed money in that IRA plan, but only if the loan is secured by someone other than the account holder.
All employers should consider opening up a SEP IRA for their employees. People are expected by the government to invest and save for their own retirement. As a result, many are worried about whether they will have a comfortable retirement, so a SEP IRA will be an attractive incentive for workers. Those who care about their family’s future and are interested in a retirement investment plan like the SEP IRA are sure to make the best and most reliable employees.