SEP IRA: A Step-by-Step Guide for Self-Employed Individuals

Learning how to open a SEP-IRA, a self-employed individual retirement account, doesn’t have to be complicated.

Here’s the experience of Lisa Aberle, a Get Rich Slowly contributor who had been working as an independent contractor since 2010, along with working a full-time job, and in 2014 left that full-time job. That meant she no longer had access to a company-sponsored retirement plan and had to figure out the remaining path to retirement as a sole proprietor.

Here’s how it went:

Step One: Answer some basic questions

Just don’t procrastinate. Questions I asked myself: Should I just contribute more to my current IRAs? Or, since my self-employment income had really taken off, should I look at the self-employment options?

Because I was afraid of making the wrong decision, I didn’t save anything for retirement for the first 17 months after leaving my full-time job.

Periodically over the 17 months, I searched for information on different self-employment plans and learned a little about SEP-IRAs, SIMPLE IRAs, and individual 401(k)s. And every couple of months, I told myself, You know, you really should figure that retirement thing out.

Step Two: Develop a criteria for the best self-employment retirement plan

Here’s what happened first. With a looming deadline, I took about 10 minutes of final research to figure out whether a SEP-IRA, SIMPLE IRA, or individual 401(k) was better for me. Truly, I am not sure I optimized my decision, but here’s what I do know: Having a good retirement plan is better than not having one.

As I did my research, my toddler was crying, my 5th grader was practicing his trombone, and my 8-year-old whined about her homework. You can imagine that my attention was drawn to words like “uncomplicated,” “simple,” and “easy to set up.”

According to my brief research, since I have no employees, any retirement plan I could choose has no reporting requirements. Also, I learned that individual 401(k)s have (way) higher contribution limits but more complicated paperwork and, depending on the broker, may also have higher administration costs. Both SEP-IRAs and SIMPLE IRAs promised to be easy to set up, with the SEP-IRA coming in with higher contributions limits, in general. I chose the SEP-IRA.

If you find yourself in a similar situation, Vanguard’s website describes the three different major retirement plans with the pros and cons of each.

Related >> Compare retirement strategies

Step Three: Figure out where to open your self-employed retirement account

Next, I had to find a broker. The looming deadline for this post also trimmed my decision-making process here. I went with Vanguard because:

• A) I have heard they usually have the lowest fees and …
• B) … their website promised to take just minutes to set up a SEP-IRA.
  (Note: This is not a sponsored post of Vanguard. I’m just a regular ol’ person sharing what I actually did.) I have also heard good things about Fidelity.

Vanguard’s website was easy to navigate. Opening the account should have been easy and it was easy, just a little more complicated than I expected.

First, if speed is also important to you, I recommend having your bank’s routing number and your account number at your fingertips to expedite the process.

All told, it took me about 10 minutes to fill out the information on the website. I did have to save my information and come back to it the next morning. I logged on, completed the application, and read the terms and conditions and other assorted legalese in about six minutes.

Then, I clicked submit … and saw this message: “Technical error — there was a problem with your registration.” Then, the website was unable to verify my identity, so I had to print off the paper copy of the information and snail mail it to Vanguard. It took three minutes to print off and review the paperwork.

The paper copy will be mailed soon. So for now, I still haven’t started contributing.

Related >> SEP IRA vs. Self-Employed 401(k)

Step Four: Just start and change later

While “open retirement account” stared at me from my to-do list, to me it seemed like a Herculean task. While I don’t think the process has gone completely smoothly, here’s how much time I have put into it so far:

Research — 10 minutes

Filling out website information — 10 minutes

Reading terms and conditions — 6 minutes

Print off and review paperwork — 3 minutes

Altogether, it took just 29 minutes.

I know I am not done yet, but 29 minutes?! I should have crossed this off my list long ago.

Have you delayed a task — especially opening a retirement account — because you thought it would be hard to do (only to find out that it’s not)? If you’re self-employed, have you opened a self-employed retirement account? Tell us about your experiences in the comments!