Time to SEP it up!

Are you a self-employed business owner that is looking for a cost effective to lower your taxes and help you save for retirement?

If that fits your profile then opening a SEP (Simplified Employee Pension) IRA might be a good retirement account to start for your business.

When I was researching what would be the best retirement plan to set up for myself when I first became self-employed, I narrowed it down between the SEP IRA and the Solo 401k.

Both allowed very favorable contribution limits, but the administrative costs and ease of setting up made the SEP IRA the easy answer.  If you are considering opening a SEP IRA for your business, here’s what you need to know about the SEP IRA rules and contribution limits and how easy it is to open one.

SEP IRA’s Have Tax Deferred Compounding

Just as a traditional IRA or 401k, your contributions are pre-tax and can significantly lower your taxable income.

You contribute pre-tax dollars to a SEP IRA, and that has the effect of lowering your tax bill. The money in the IRA grows tax-deferred, and your business doesn’t pay any taxes on the IRA earnings. The assets can be invested in many ways.

The traditional IRA rules apply. When you take the money out of a SEP IRA for retirement, you pay ordinary income taxes on it. (Should you withdraw SEP IRA assets before age 59½, you’ll likely be assessed a penalty, with some exceptions.)

SEP IRA Contributions are Discretionary.

One huge bonus for business owners is that you are not required to contribute to a SEP IRA each year.  In addition, there is not a set amount that you have to put in.  This flexibility is priceless for a business owner that has fluctuating net income year after year.

Also, you are not subject to the typical IRA deadline to contribute: April 15th.  If you file a tax extension, you can wait until then to make the contribution.

How Much Can you Contribute to a SEP IRA?

In 2011, you can contribute up to 25% of an eligible employee’s compensation, up to a limit of $49,000. No catch-up contributions are permitted for older employees.  Based on the 25% rule the income threshold is $196,000.  Over an above that you will not be able to contribute any more.  That’s when you might want to consider some other business retirement plans.

What Makes Employees Eligible for a SEP IRA?

If you have employees, then provided they pass a series of test, you will have to contribute the same percentage to them- just based on their salary- not yours. Generally, employees of a small business are eligible for a SEP IRA if they

If you have employees that have ties to a union contract, they may be excluded from having to make contributions.

Opening a SEP IRA is Easy Breezey.

Opening a SEP IRA is just as easy opening a regular investment account. You can open up one of these plans with the help of almost any financial advisor or financial institution.

In fact, you can even have other retirement plans at your business in addition to SEP IRAs, and you can set up a SEP IRA for your small business even if you are already participate in another retirement plan at another company.

So if you have a small business or work on your own and you want a retirement plan that works for your future without a lot of hassles, talk to a financial professional to see if a SEP IRA is right retirement account  for you to open today.

photo credit: khowaga1

When I worked for my old brokerage firm, I was a W-2 employee and the retirement plan options were simple.  I had the 401k and could also do a Traditional or Roth IRA outside of it.  Things changed a bit when I started my own company.  I officially became a small business owner and had man more choices on retirement plans. What options do hands-on owner-operators have and which one is the best for you? If you have a small company and want a retirement program, you want to consider these plan choices.

photo credit: eflon

The SIMPLE IRA.

These plans are very easy to create, and they have very low administrative costs and no annual IRS reporting requirements. You set up traditional IRAs for each eligible employee; they can contribute to the IRA on a tax-deferred basis (via payroll deductions, and you can either match the contributions of plan participants or contribute a fixed percentage of all eligible employees’ pay. The employees own the money in their IRAs.

I had considered going with the Simple IRA initially, but the one item I didn’t like is that it has a 25% early withdraw penalty for the first two years.  This is well over the standard 10% all other plans have.  In the event I did get into a bind, I didn’t like the idea of having to pay the extra to get it out.

The SEP IRA.

A Simplified Employee Pension plan lets you make contributions toward your retirement and your employees’ retirements. (You can even have a SEP and another kind of retirement plan at your business simultaneously.) A SEP allows business owners annual tax-deductible contributions equal to 25% of your compensation (if you have a corporation) or 20% of self-employment income (for a sole proprietor).

This is currently what I have and should satisfy me for a few more years.   Pretty soon I hope to graduate to the next level….

The Solo 401(k).

photo credit: adamhgs

Are you ready to fly solo?  As in a “Solo” 401(k). Yes, you can have a 401(k) when you are self-employed. A business owner may establish one and include their spouse in the plan, provided the spouse is an employee of the business. A solo 401(k) throws in a profit-sharing twist on the standard 401(k). Solo 401ks may be funded by the employee (deferred compensation) and the business (a percentage of profit). As an employee of your business, you can contribute an amount up to the standard yearly 401(k) contribution limit (catch-up contributions permissible if you are 50 or older). Additionally, solo 401(k) plans allow you to make tax-deductible profit-sharing contributions equal to 25% of your compensation (corporate entity) or 20% of self-employment income (sole proprietor). It is even possible to have a solo Roth 401(k). These plans do require a TPA (third-party administrator).

Ultimately, the Solo 401(k) will allow me to contribute the most pre-tax, but my income has to get me there first

Profit-sharing plans.

Here’s one way to compete with larger companies for prime employees. Contributions are usually deductible at both the federal and state level, with contribution limits equivalent to a SEP. Contributions aren’t mandatory. If your business has a bad year, you don’t have to make them. The assets placed within the plan grow tax-deferred. Again, annual tax-deductible contributions may be made according to the 25%/20% rule depending on your business entity.

New comparability plans.

Basically, this is a form of profit-sharing plan that rewards senior or key employees more than others. The classic situation for this plan is when you have a small business whose multiple owners take home similar earnings, but are of different ages. The plan must be tested to meet Internal Revenue Code nondiscrimination requirements, of course. It allows different levels of compensation to different groups within a small business.

What plan is best for your business?

If you are reading this, you are probably thinking about putting a plan into place or switching to a retirement program more easily administered than the one you have now? But which one should you choose – and what is the next step? Take a big step today and take advantage of all that is available in the marketplace – consult an independent financial professional and  a CPA to review your options and find the program that fits your needs.