A Simplified Employee Pension, or SEP IRA, is a basic retirement account much like a traditional IRA. SEP IRA contributions are tax-deductible, and investments grow tax-deferred until retirement, when distributions are taxed as income. A SEP IRA may be a better choice for you….
- If you have employees and want to choose which years to contribute to employee retirement accounts, especially if your business profits fluctuate from year to year; or
- If you’re a sole proprietor and want to save as much money for retirement as allowed, but only want to make employer contributions.
A SEP IRA is a retirement savings plan that’s inexpensive to establish and easy to maintain. Employer contributions aren’t required annually, making it a good option for business owners who only want to contribute during high-profit years. Other benefits include:
- Amount of contribution allowed. The 2019 contribution limit is the lesser of $56,000 or 25% of compensation. This is also the limit for how much you can contribute for each eligible employee. The amount of compensation you can use to calculate the 25% limit is limited to $280,000 in 2019 (up from $275,000 in 2018). There are no catch-up contributions allowed for this plan type.
- Contribution structure. Only employers may contribute to employee accounts. If you have employees whom the IRS considers eligible participants in your plan, you must contribute on their behalf, and those contributions must be an equal percentage of compensation to your own. Employers aren’t required to contribute to accounts every year. Contributions are immediately 100% vested.
- Ease of Opening. Starting a SEP IRA is similar to opening a traditional or Roth IRA, though there are some additional paperwork and reporting requirements, especially if you have employees.
- Cost per employee. There are usually minimal setup fees for this type of plan. Plan participants pay trading commissions and fund expense ratios. Depending on the plan provider, there may be account service or maintenance fees.
- Type of filing. Doesn’t require employers to file IRS form 5500 or submit to nondiscrimination testing.
A SEP IRA is ideal for businesses that want a plan that’s easy to set up and maintain, and allows the employer the flexibility of choosing which years to make contributions to employee accounts. Because of the rule requiring equal contributions as a percentage of compensation, a SEP IRA work best for self-employed entrepreneurs and professionals, or small-business owners with few employees.
Like all major financial decisions, consult a financial advisor for retirement and investment advice specific to your financial goals and business needs. At TFG, we understand that small business owners and sole practitioners may be concerned about cash flow and saving enough for retirement. Feel free to contact me, Cory Lyon, directly at 561-209-1120, with any questions regarding the right retirement strategy for you. I act as a fiduciary for all my clients.
TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.
