Disadvantages Of SEP IRAs

SEP IRA accounts are great, easy and affordable for most small businesses. What is an SEP IRA account? A SEP IRA account stands for a Simplified Employee Pension and it is a retirement plan that is designed to help small businesses and their employees save money on annual taxes and save for the future. IRAs in general are a great tool for financial security and they open a lot of doors for future finances and SEP IRAs are just a branch off the traditional IRA accounts. When you deposit income into your SEP IRA you are lowering your taxable income and the end result is you do not have to pay out as much to the IRS. However, while SEP IRAs are a great tool for retirement planning there are a few down sides as well.

Here are some of the more obvious disadvantages of a SEP IRA:

As a small business owner you are required to put the same percentage of contributions (deposits) into your employee’s accounts that you put into yours. So, if you put 25% of your gross income into your own SEP IRA account you will need to compute 25% of each employee’s income and put that money into their account. And, it does not matter if your employee’s contribute to their own account or not, if you contribute to your account you have to contribute to theirs.
SEP IRA accounts are not good for businesses that have employees. The best use of SEP IRA accounts is for self employed businesses because then you can put large percentages (18.58%) of your income into the account without having to pay employees or match contributions.
Since you are putting money into an IRA, SEP or not SEP, you are going to have little use for it until you turn 59 ½. Now, this could be a good thing or a bad thing, depending on how you look at it. It is good because instead of being tempted to spend your cash flow quickly, you are forced by the IRS to plan for your retirement in a financially secure way. It is bad because obviously you cannot touch the money until you are nearly 60. While there are exceptions to this rule it usually costs up to 10% of your withdrawal as a mandatory fee.

Despite these obvious negatives, there are some pretty nice positives of SEP IRAs, don’t forget. You get: tax deductions, tax deferred earnings, low maintenance cost, high contribution levels, etc.

Whatever your decision, consult an accountant or broker before making a final decision and remember, examine the disadvantages of SEP IRAs before deciding completely!