Banking & Savings, Insights

KEOGH Vs SEP

flik eco finance personal keogh vs sep

Making the decision between KEOGH Vs SEP can be difficult. Both options have their own advantages and disadvantages, and it can be hard to decide which is the best choice for you.

In this article, we will compare and contrast KEOGH Vs SEP, so that you can make an informed decision about which option is best for your personal finances.

What is a KEOGH?

A KEOGH is a retirement savings plan for self-employed individuals or unincorporated businesses. It is similar to a 401k, but there are some important differences. A KEOGH allows you to set aside up to 25% of your income for retirement, and it has special tax advantages.

What is a SEP?

A SEP is a Simplified Employee Pension, which is a retirement savings plan that can be established by small businesses and self-employed individuals.

A SEP allows employers to make contributions on behalf of their employees, and employees are then able to make tax-deductible contributions to the plan as well.

What is The Difference Between a KEOGH and a SEP?

The answer to this question is not as simple as it may seem. Both KEOGHs and SEPs are retirement plans, but they differ in a few key ways.

A KEOGH is a qualified retirement plan that allows self-employed individuals or small business owners to make tax-deferred contributions. A SEP, on the other hand, is a simplified employee pension plan that can be established by any size business.

SEPs are generally easier to set up and maintain than KEOGHs, but they also have some key disadvantages. For one, SEP contributions are not tax-deductible. This means that you will have to pay taxes on the money you contribute to a SEP when you withdraw it in retirement.

KEOGHs, on the other hand, offer tax-deferred growth on your investment. This means that you won’t have to pay taxes on the money you make from your KEOGH until you retire.

Another key difference between KEOGHs and SEPs is the contribution limit. With a KEOGH, you can contribute up to 25% of your net self-employment earnings (up to a maximum of $53,000 in 2020). With a SEP, you can contribute up to 25% of your salary (up to a maximum of $57,000 in 2020).

What Are The Different Types of KEOGH?

There are two types of KEOGH plans:

  • Traditional KEOGH
  • Roth KEOGH

Traditional KEOGH

Traditional KEOGHs are funded with pretax dollars, meaning you don’t pay taxes on the money you contribute until you withdraw it in retirement.

Roth KEOGH

Roth KEOGHs are funded with after-tax dollars, so you don’t get a tax deduction for your contributions but you also don’t have to pay taxes on the money when you withdraw it in retirement.

What Are The Different Types of SEP?

There are three types of SEP: Traditional, Roth, and SIMPLE.

  • Traditional SEP
  • Roth SEP
  • SIMPLE SEP

Traditional SEP

A traditional SEP is funded with pretax dollars. This means that the money you contribute to your account reduces your taxable income for the year. When you retire and start taking distributions from your account, those withdrawals are taxed as ordinary income.

Roth SEP

A Roth SEP is funded with after-tax dollars. This means that you don’t get a tax deduction for the money you contribute to your account. However, when you retire and start taking distributions from your account, those withdrawals are not taxed.

SIMPLE SEP

A SIMPLE SEP is similar to a traditional SEP, but there are some key differences. First, you can only contribute up to $12,500 per year to a SIMPLE SEP (as opposed to $25,000 for a traditional SEP). Second, you must make contributions to all employees who participate in the plan (including yourself), regardless of how much they earn.

What Are The Advantages of a KEOGH?

The main advantage of a KEOGH is the high level of contribution limits. For 2019, the contribution limit for a KEOGH is $56,000. This is significantly higher than the $19,000 contribution limit for a SEP IRA. This means that you can contribute more money to your retirement savings with a KEOGH.

Another advantage of a KEOGH is that you have more control over your investment choices. With a SEP IRA, you are limited to investing in mutual funds. With a KEOGH, you can choose from a wider range of investment options, including stocks, bonds, and ETFs. This gives you more flexibility when it comes to your retirement savings.

What Are The Advantages of a SEP?

There are a few advantages of going the SEP route. Primarily, it’s much easier to set up and manage than a traditional 401(k) or 403(b). You also have more flexibility when it comes to making contributions – you can choose to contribute more (or less) in any given year, depending on your business’s financial situation.

Another big advantage of SEPs is that they tend to have lower fees than traditional retirement plans. This is because there’s no need to hire a third-party administrator, and the investment options are typically simpler (and therefore cheaper).

Finally, SEPs offer more generous contribution limits than most other retirement plans. For 2020, the contribution limit is $57,000 (or 25% of eligible compensation, whichever is less). This is significantly higher than the 401(k) contribution limit of $19,500 (or $26,000 for those over 50).

What Are The Disadvantages of KEOGH?

The disadvantage of a KEOGH is that you are limited in the amount of money you can contribute each year. For 2019, the contribution limit is $56,000. This number goes up each year with the cost of living increases, but it’s still a finite number. If you have a high income, you may want to consider a SEP IRA which has much higher contribution limits.

Another disadvantage of a KEOGH is that it’s a bit more complicated to set up and maintain than a traditional IRA. There are more paperwork and reporting requirements, and you must file an annual return with the IRS. If you’re not comfortable dealing with this extra paperwork, a traditional IRA may be a better option for you.

Finally, KEOGHs are not available to everyone. If you’re self-employed or work for a small business with less than 25 employees, you won’t be able to set up a KEOGH. In this case, a SEP IRA may be a good alternative.

What Are The Disadvantages of SEP?

There are a few disadvantages of SEP that you should be aware of before making your decision.

First, with a SEP you are limited to investing in traditional IRA-compatible investments like stocks, bonds, and mutual funds. This means that if you want to invest in something else, like real estate or private equity, you can’t do it through a SEP.

Second, you are also limited in how much you can contribute to a SEP each year. The contribution limit for 2019 is $56,000, but that number goes up if you’re over the age of 50.

Third, there is no catch-up provision for SEP contributions, so if you’re behind on your retirement savings, a SEP might not be the best option for you.

Fourth, SEP contributions are not tax-deductible, so if you’re in a high tax bracket, a SEP might not save you as much money as another retirement savings option like a 401(k).

Lastly, SEP contributions are subject to mandatory distribution rules, so if you need the money before retirement, you may not be able to access it without paying a penalty.

So, Which One Should You Use?

The answer to this question depends on a few factors. If you’re self-employed or have a small business with no employees, then a SEP is probably the better choice. On the other hand, if you’re an employee of a large company, then a KEOGH might be the better option.

What Are Some Alternatives to Using a KEOGH or a SEP?

There are a few alternatives to using a KEOGH or SEP.

401k

One option is to use a 401k. A 401k is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their paycheck into the account. The money in the account grows tax-deferred and can be withdrawn after retirement.

IRA

Another alternative is to use an IRA. An IRA is an individual retirement account that can be opened by anyone with earned income. There are two types of IRAs, traditional and Roth. Traditional IRAs grow tax-deferred and withdrawals are taxed as ordinary income in retirement. Roth IRAs grow tax-free and withdrawals are tax-free in retirement.

Taxable Brokerage Account

The last alternative is to use a taxable brokerage account. A taxable brokerage account is an investment account that is not tax-deferred. This means that any gains or losses in the account are taxed each year. However, there are some tax benefits to using a taxable brokerage account, such as the ability to deduct losses and the ability to take advantage of lower capital gains tax rates.

What Are Some Tips For Using a KEOGH?

If you’re looking to set up a KEOGH, there are a few things you should keep in mind. First, you’ll need to choose a trustee for your plan – this can be a bank, financial institution, or even a family member. You’ll also need to decide how much money you want to contribute each year, as there are limits on how much you can contribute.

Once you’ve set up your KEOGH, you’ll need to make sure that you contribute regularly. This means setting up a schedule and making sure that you stick to it. You also need to make sure that you’re investing in a diversified portfolio of assets, as this will help you to maximize your returns.

Finally, it’s important to remember that a KEOGH is a long-term investment. This means that you shouldn’t withdraw funds from your account until you’re retired. If you do need to withdraw funds before retirement, there may be taxes and penalties associated with doing so.

What Are Some Tips For Using a SEP?

There are a few key things to remember when using a SEP. First, you need to have an employer-sponsored retirement plan in place before you can establish a SEP. Second, your contributions must be made directly to each employee’s individual retirement account (IRA).

Third, the contribution limit for a SEP is much higher than for a traditional IRA. For 2018, the contribution limit is $55,000 (or 25% of eligible compensation), compared to just $5000 for a traditional IRA.

Fourth, you’ll need to file a SEP-IRA form with the IRS each year. This form simply states how much you’ve contributed to each employee’s retirement account.

Finally, remember that SEP contributions are tax-deductible for your business. This can be a significant advantage, especially for small businesses.

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About Jermaine Hagan (The Plantsman)

Jermaine Hagan, also known as The Plantsman is the Founder of Flik Eco. Jermaine is the perfect hybrid of personal finance expert and nemophilist. On a mission to make personal finance simple and accessible, Jermaine uses his inside knowledge to help the average Joe, Kwame or Sarah to improve their lives. Before founding Flik Eco, Jermaine managed teams across several large financial companies, including Equifax, Admiral Plc, New Wave Capital & HSBC. He has been featured in several large publications including BBC, The Guardian & The Times.

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