Taking Charge of Your Retirement with a SEP-IRA

Do you own your own business? Do you have significant income from self-employment? Do you want to be able to accumulate significant amounts of money each year, tax-deferred for your retirement? Do you want to keep the hassles of plan sponsorship and entangling long-term funding obligations to a minimum? If so, you may be a great candidate for a SEP-IRA, or SEP for short.

SEP stands for Simplified Employee Pension plan, and is one of just a few affordable, accessible options that enable business owners and the self-employed to set aside significant amounts of money for retirement, tax-deferred, over and above an IRA.

How it works

A SEP plan allows business owners and self-employed individuals to contribute money easily to IRA accounts for employees. A big part of the attraction of SEPs is the ability for owner-employees to contribute to their own accounts, along with their employees. Likewise, self-employed individuals and independent contractors can contribute to their own accounts, as well. The catch: Those plan sponsors who have employees must contribute equally for all their eligible employees.

Advantages and Disadvantages

The SEP IRA is extremely easy to set up and operate, compared to other pension plans. The IRS even provides a tax credit of up to $500 per year, or 50 percent of any set-up costs, for up to five years, for employers who choose to set up a SEP IRA.

The SEP also features low administrative costs, and generally generates little or no ongoing filing requirements from the plan sponsor.

Employees do not contribute to SEPs - these plans only take in employer contributions and contributions from the self-employed acting as the plan sponsor and their own employer. In either case, contributions are tax-deductible to the employer, and not currently taxable to the employee. Instead, the balances grow tax-deferred, until the worker takes a distribution. Distributions are taxed as ordinary income.

Vesting is immediate, and employees can take in-service withdrawals from SEP plans as desired. However, those who take a distribution prior to age 59½ will generally face a 10 percent excise tax, just like IRAs, unless specific hardship circumstances apply.

Unlike 401(k) plans, SEPs do not allow for employee loans. If this is an important feature to you, you may want to elect to set up a 401(k) or solo/sole-proprietor 401(k), as appropriate.

Also, unlike 401(k) plans, there is currently no Roth option for SEP plans. You must choose the traditional, tax-deferred growth scheme.  If Roth tax treatment is important to you, again, you may want to consider using a 401(k) plan rather than a SEP, which frequently allow the plan sponsor elect to offer a designated Roth account within the 401(k).

Contribution limits: Employers can contribute up to 25 percent of employee compensation, or $52,000, whichever is less, as of 2014. Catch-up contributions do not apply in SEP plans.

Required Minimum Distributions

Plan beneficiaries cannot defer taxes on balances in these accounts forever. You must begin taking distributions and paying income taxes on them not later than April 1stof the year after the year in which you turn 70½. The rules are similar to those for traditional IRAs, SIMPLE IRAs and 401(k)s, in this regard. The failure to take required minimum distributions on time, each year, or you may face significant tax penalties.

Who are SEPs For?

SEPs may work well for any business owner, sole-proprietor, self-employed individual or independent contractor who wants one or more of these SEP features and benefits:

• An employer-sponsored retirement plan
• High contribution limits
• Low costs
• Simple and inexpensive administration
• Funding flexibility - there is no obligation to fund these plans in any given year. If your budget is tight, you can skip the year if you want.
• A way to compensate employees and compete for talent
• Tax deferral
• Some creditor protection (depending on your state)

To consider your options, or to get started setting a plan up for yourself and/or your business,  see IRS Publication 560, Small Business Retirement Plans

For more information, feel free to Contact Neptune Financial to schedule an appointment.

Basic Understanding

This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings.

An individual seeking information regarding their investment or retirement needs should contact a financial professional.

Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.