As I detailed in my New Year's Resolutions post, one of the goals I had for 2017 was to open a 457 account through my employer. Unfortunately I was recently informed by our employee benefits department that the 457 plan had been discontinued. So there goes that resolution. But I'm unwilling to accept the loss of such a great tax shelter, so I went looking for a substitute. After some research, I opened a SEP IRA account.
What's an SEP IRA?
An SEP IRA stands for "Simplified Employee Pension Individual Retirement Account." SEP IRA is one of several tax-advantaged retirement plans specifically designed for small business owners and self-employed individuals. The other options include the SIMPLE IRA and the Individual (or Solo) 401k. Each plan has pros and cons which may benefit you more depending on your situation but that's beyond the scope of this post. Check out this comparison by Vanguard for the differences between these options. Here are the basics of an SEP IRA:
- Functions like a Traditional IRA - contributions are tax deductible, you get taxed when you withdraw from the plan in retirement (take a distribution).
- Employer contributions only - think of this like a profit sharing plan. But both employer and employee benefit.
- Easy and cheap to setup and maintain.
- High annual limits - For 2017, you can receive up to 25% of wages or $54,000 if you are an employee. Or if you are self employed, through some magic of math complicated by the FICA tax and Self Employment Tax, your limit ends up being 18.6% of net profit or $54,000.
There are some additional benefits that make the SEP IRA a particularly attractive option in my situation.
- Extra tax-advantaged investment space - As far as investment accounts go, you can't get much better than tax-deferred or tax-free investment accounts. And the further along you get in your medical career, the fewer of these you are going to qualify for. The best part about the SEP IRA is that the contribution limit is separate from limits on your 401k, Traditional/Roth IRA, HSA contributions etc. That alone made it better than than the Individual 401k in my situation because I was already maxing out my 403b from work.
- Contributions are treated as an Adjustment to Income - or above-the-line deduction. Which means you can benefit even if you claim the standard deduction, which is probably the case for most medical trainees.
- Contribution flexibility - You can contribute to an SEP IRA up until your tax filing deadline (April 18 in 2017) or even later if you file an extension. Which is fantastic because you can decide how much to contribute based on your tax needs. Had a great year and want to lower your taxable income? Contribute the max. Had a bad year? Contribute $0!
I've never thought of myself as an entrepreneur but thanks to your support of FPMD, I am one now. Don't get me wrong, it's no White Coat Investor. But I'm immensely grateful that you choose to spend a few minutes of your busy day on the random thoughts of a radiology resident. Even if you didn't have a business of your own, you may still qualify for an SEP IRA if you have any 1099 income outside your primary residency/fellowship income (e.g. moonlighting). Definitely something worth looking into if you are looking for additional tax advantaged investing space.
Stephanie Arcelay (Sun Trust Mortgage) specializes in serving the mortgage financing needs of licensed medical doctors and dentists. Whether you are a resident in training or a practicing physician, you will find many benefits of the Doctor Loan mortgage, including:
- Fixed or adjustable-rate options.
- Up to 100% financing and no monthly PMI payments.
- Flexible repayment terms to meet your financial need.