Is a Vanguard SEP IRA Account Right for You?

The Simplified Employee Pension IRA (SEP IRA) offered by the Vanguard Group is considered one of the best individual retirement account (IRA) products available. Though SEP IRAs are a popular retirement savings vehicle and are offered by many different financial institutions, the Vanguard SEP IRA offers a unique combination of affordability, diverse investment options, high-quality customer service, and ease of use.

If your business does not currently offer a retirement savings plan and you’d like an inexpensive option that allows you to contribute to the retirement savings of all your employees at your discretion, a Vanguard SEP IRA may be right for you.

What Is a SEP IRA?

A SEP IRA is a retirement savings plan offered by businesses to help their employees save for retirement, or they may be set up by the self-employed for their own benefit. Rather than being funded by employee salary deferrals, like a 401(k), a SEP IRA is funded solely with employer contributions made directly to individual retirement accounts (IRAs) held by employees.

Employees retain full ownership of their IRAs and may make after-tax contributions if their specific plan allows, but the employer is primarily responsible for contributing to each employee’s account on their behalf.

Employer contributions are limited to $57,000 in 2020 and $58,000 in 2021, or 25% of employee compensation, whichever is lower. If employees are allowed to make contributions, the limit is $6,000 per year in both 2020 and 2021, or $7,000 each year for those aged 50 and older because of permitted catch-up contributions. 

Contributions for the self-employed are limited to 20% of net income. Net compensation for self-employed individuals is generally the net profit from IRS Schedule C reduced by the deductible self-employment tax. The 2020 eligible compensation limit is $285,000, and in 2021, the eligible compensation limit is $290,000. 

Employees must be allowed to participate if they’re 21 or older and earn at least $600 in 2020 or $650 in 2021. Also, they must have worked for you in at least three of the past five years, though employers may set less restrictive eligibility rules. Contributions to a SEP IRA must be made by the employer’s tax deadline (plus extensions).

Affordability

In general, SEP IRAs are one of the more affordable retirement benefit options for employers. Since IRAs are owned by employees individually, the administering institution does not have to manage plan assets, which greatly reduces operating expenses. This makes SEP IRAs especially attractive to small business owners who may not have the excess capital to maintain more administratively intense plans.

The Vanguard SEP IRA

The chief advantage of the SEP IRA offered by Vanguard is that it is relatively cheap compared to other SEP products. Vanguard is owned by the shareholders of its mutual funds, so it does not benefit the company to charge more in fees than is truly necessary. When the company makes money, its shareholders make money, whether they hold their investments in SEP IRAs or individual brokerage accounts.

Investment Options

Like other IRA products, Vanguard’s SEP IRA allows participants to invest in a range of mutual funds, exchange-traded funds (ETFs), and individual stocks.

Vanguard mutual funds are, on average, about 82% cheaper than comparable funds offered elsewhere. They charge no load fees, no 12b-1 marketing fees, and no commissions.

A Vanguard one-person SEP IRA can invest in mutual funds and ETFs offered by Vanguard, as well as mutual funds and ETFs from other companies, individual stocks, certificates of deposit (CDs), and bonds. There is no minimum investment. A Vanguard SEP IRA for more than one person may include only Vanguard mutual funds, including Admiral Shares—low-cost index funds and actively managed funds that are limited to larger account balances ($3,000 for index funds, $50,000 for most actively managed funds, or $100,000 for certain sector-specific index funds).

Through an individual brokerage account within a SEP IRA, an account holder can purchase stocks, bonds, ETFs, and options contracts outside of the Vanguard portfolio. While these trades incur commission charges, the amount of the charge decreases as the size of the account grows.

Accounts with less than $10,000 may incur a $20 annual service charge per Vanguard mutual fund held in the account. Account-holders can circumvent this charge by signing up for electronic statements. Vanguard Personal Advisor Services is available for one-person SEP IRA holders, though it requires a $50,000 minimum investment.

Customer Service and Online Platform

The quality of service provided and the user-friendly online platform are two more reasons why Vanguard’s SEP IRA and its other retirement savings products stand out from the crowd. Many people know they need to save for retirement, but they are not sure how to go about it or how to invest those savings. While no customer service system is foolproof, Vanguard seems to have a fairly good handle on what investors need.

Customer service representatives are available by phone and email. Vanguard’s user-friendly website also has an extensive support center designed to help investors troubleshoot their own issues.

In addition to information about its products and the various investments available, the Vanguard site provides members with resources for planning their retirements and meeting their individual investment goals, including income calculators, expense spreadsheets, and tax filing information. The site provides a simple platform for plan-sponsoring employers to manage contributions and for employees to track the progress of their investments.