FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsMedium
A 50-year-old client, self-employed as a successful consultant, is looking for a retirement savings vehicle that allows for significant contributions, tax-deductible contributions, and flexible administration. They have no employees. Which retirement plan would be MOST suitable for this client?
- ASIMPLE IRA
- B401(k) Plan
- CTraditional IRA
- DSEP IRA
Show answer & explanationAnswer & explanation
Correct answer: D. SEP IRA
A SEP IRA is ideal for self-employed individuals with no or few employees, allowing for significant, tax-deductible contributions (up to 25% of compensation, limited by IRS maximums) and simpler administration compared to a 401(k).
Why the other options are wrong
- A. SIMPLE IRAs (Savings Incentive Match Plan for Employees) are for small businesses with up to 100 employees and have lower contribution limits than SEPs, and require employee contributions or matching.
- B. A 401(k) plan is generally for businesses with employees and involves more complex administration than a SEP IRA for a sole proprietor.
- C. Traditional IRAs have much lower contribution limits than what a successful self-employed individual might seek.
SEP IRA (Simplified Employee Pension IRA)
A retirement plan designed for self-employed individuals and small business owners, allowing for significant, tax-deductible contributions.
- High contribution limits (up to 25% of compensation, max $69,000 for 2024).
- Contributions are tax-deductible.
- Simple to establish and administer, especially for sole proprietors.
- Only employer (or self-employed individual) contributes.
Memory trick: Self-Employed: 'S'ave 'E'normous 'P'ortions with SEP.