SEP IRA 101: Is It the Right Plan for You?

​Are you self-employed? Or do you own your own business? If so, you likely have a lot of challenges on your plate. You have to provide great service to your customers, prospect for new customers and manage your company’s cash flow. You also may have to manage your employees, develop new products and services and work to achieve your long-term goals. As a business owner, you probably wear many different hats.
 
Retirement may be one challenge that isn’t on your radar. Many business owners assume they can work as long as they want. They funnel their energy and resources into their business rather than plan for the future.
 
However, retirement is too important to ignore. You may not be able to work forever, and you may not be able to sell your business to fund your retirement. It’s always helpful to have assets set aside for retirement. Also, a business retirement plan may be a helpful tool to attract new employees.

Unfortunately, a 401(k) plan is often too costly and too much of an administrative burden for a small business or a self-employed individual. The good news is you have an alternative—the Simplified Employee Pension plan, or SEP IRA. Below are a few tips on how the SEP IRA can help you and your employees prepare for retirement:


What is a SEP IRA?
A SEP IRA is a qualified retirement savings vehicle designed specifically for small businesses and self-employed individuals. From a tax standpoint, it’s treated much like a traditional IRA. You can deduct your contributions, and all growth is tax-deferred. Your distributions are taxed as income, and you could face a 10 percent penalty if you take a distribution before age 59½.
 
Most SEP IRA custodians offer a wide range of investment options, so you and your employees can each choose the allocation that’s right for your goals and risk tolerance. If you ever leave the business, you can roll your vested balance into a traditional IRA.


How much can you contribute?
One of the key differences between a traditional IRA and a SEP IRA is the amount you can contribute each year. In 2018 you can contribute as much as $5,500 to a traditional or Roth IRA. That limit increases to $6,500 if you’re age 50 or older.1
 
However, you can contribute up to 20 percent of your net income to a SEP IRA, with a maximum allowable contribution of $55,000.2 Keep in mind that these contributions are tax-deductible, so they can have a big impact on your current taxes as well as your financial stability in retirement.


Who can participate?
The SEP IRA is a powerful tool for business owners, but employees can participate in it, too. In fact, you have to open up the plan to any employee who is at least 21 years old, earned at least $600 in the past year and has worked for you in three of the last five years.3
 
Employees don’t make their own contributions. Instead, you must contribute the same percentage of their income as you contribute for yourself. For example, if you contribute 5 percent of your income to the SEP, you must also contribute 5 percent of each participating employee’s income.
 
Contributions to the SEP are discretionary, so you can pause them in a given year if cash flow is tight. If you don’t make contributions for employees, however, you also can’t make them for yourself.
 
Ready to develop your SEP IRA strategy? Let’s talk about it. Contact us at First Fidelity Group. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.


 
1https://www.rothira.com/2017-roth-ira-limits-announced
2https://www.kiplinger.com/article/retirement/T047-C000-S003-sep-ira-contribution-limits-for-2018.html
3http://money.cnn.com/retirement/guide/selfemployment_sep_ira.moneymag/index2.htm?iid=EL
 
 
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