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 plan that allows for significant pre-tax contributions and minimal administrative hassle. They anticipate their income will remain high. Which retirement plan would be MOST suitable for this client?
- ARoth IRA
- B401(k) Plan
- CTraditional IRA
- DSimplified Employee Pension (SEP) IRA
Show answer & explanationAnswer & explanation
Correct answer: D. Simplified Employee Pension (SEP) IRA
A SEP IRA is ideal for self-employed individuals and small business owners as it allows for much higher contribution limits than Traditional or Roth IRAs, offers pre-tax contributions, and has relatively low administrative costs, fitting the client's needs perfectly.
Why the other options are wrong
- A. A Roth IRA has lower contribution limits and contributions are after-tax, which doesn't align with the client's desire for 'pre-tax contributions'.
- B. A 401(k) plan is typically sponsored by an employer and involves more administrative complexity than a SEP IRA, and is not directly applicable for a self-employed individual unless they set up a Solo 401(k), which still has more administration than a SEP.
- C. A Traditional IRA has much lower contribution limits ($7,000 for age 50 in 2024) compared to a SEP IRA, not allowing 'significant' contributions for a high-income individual.
Simplified Employee Pension (SEP) IRA
A retirement plan primarily for self-employed individuals and small businesses, allowing for large, tax-deductible contributions with low administrative costs.
- Employer (or self-employed) contributions only.
- Contributions are tax-deductible.
- Higher contribution limits than Traditional/Roth IRAs.
Memory trick: SEP: Self-Employed's Easy Path