FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsHard
A client, a 48-year-old self-employed artist, is seeking to save for retirement. They anticipate fluctuating income year-to-year and want an investment vehicle that allows for flexible contributions, tax-deferred growth, and a broad range of investment choices. They are comfortable managing their own investments to some extent. Which of the following retirement plans would be MOST suitable?
- ASEP IRA
- BTraditional IRA
- C401(k) Plan
- DSIMPLE IRA
Show answer & explanationAnswer & explanation
Correct answer: A. SEP IRA
A SEP IRA (Simplified Employee Pension IRA) is specifically designed for self-employed individuals and small business owners. It allows for flexible, larger contributions than a Traditional IRA, offers tax-deferred growth, and typically provides a broad range of investment choices, making it highly suitable for an artist with fluctuating income who wants to manage their own investments.
Why the other options are wrong
- B. Traditional IRAs have lower contribution limits, which may not be sufficient for a high-income individual seeking to maximize retirement savings.
- C. A 401(k) plan is typically sponsored by larger employers and involves more complex administration, not ideal for a self-employed artist who wants flexibility and to manage their own investments.
- D. SIMPLE IRAs are for small employers (up to 100 employees) and have lower contribution limits than SEPs, and require employer contributions, which may not fit a self-employed individual's needs.
SEP IRA Suitability
A Simplified Employee Pension (SEP) IRA is a retirement plan designed for self-employed individuals and small business owners, offering flexible and high contribution limits with tax-deferred growth.
- Contributions are made by the employer (even if self-employed).
- Contribution limits are significantly higher than Traditional or Roth IRAs.
- Highly flexible contributions, can vary year-to-year.
- Simple to set up and administer compared to other employer-sponsored plans.
- Suitable for self-employed individuals with unpredictable income.
Memory trick: SEP for the self, SIMPLE for small, 401(k) for all (larger firms).