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Retirement Plans For The Self-Employed
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Article 5: SEP-IRA
The Simplified Employee Pension-Individual Retirement Account, better known as the SEP-IRA, is specifically designed for self-employed people and small-business owners.
SEP-IRAs are good options for businesses with no employees and those with up to 10 employees. The attraction is partly because of the plans’ flexibility and because they lack the startup and operating costs of other plans. As the name implies, SEPs are simpler than plans such as Keoghs and less costly to open through a broker or mutual fund company.
A sole proprietor, a member of a partnership or the owner of an incorporated or unincorporated business can contribute from zero to 25 percent of annual compensation, up to $42,000. Owners age 50 or older can make an additional catch-up contribution of $3,000. You may participate even if you are already covered by a retirement plan at a full-time job, provided that you also earn self-employed income.
If you have employees, the plan requires you to make employer contributions into each eligible employee’s separate SEP-IRA at the same percentage of compensation that you make for yourself. For employees the entire contribution is excluded from current income for tax purposes, and taxes are paid when the money is withdrawn. The contribution belongs to the employee immediately and forever, including if the employee leaves your company.
For the self-employed, your contribution is based on the net profit from the business, rather than gross income. The maximum compensation on which contributions can be based is $210,000, and investment earnings are tax-deferred until withdrawn.
SEP-IRAs are simple, with no complicated forms to fill out or annual reports to file. And if you have employees, a SEP-IRA is a fringe benefit that can engender long-term commitment by those you hire, since tax-deferred retirement savings are contributed by the employer.
The contributions to SEP-IRAs can be much larger than amounts contributed to regular IRAs. You are not required to contribute a specific amount annually or even to make a contribution. That means in years when your business doesn’t thrive, you can choose to cut back or not to contribute at all. Contributions also can be made up until the date you file your taxes, including filing extensions.
SEP-IRAs are an easy, low-cost retirement plan option for employers, including the self-employed. Whether a SEP-IRA is right for you depends on revenue, your business size, your age, compensation and retirement needs. As with other retirement options, discuss SEP-IRAs with a professional financial advisor.
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Retirement Plans For The Self-Employed
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