Retirement Read Time: 3 min

Is a SEP-IRA Right for Your Business?

If you're like many small business owners, running your own business is an all-consuming endeavor.

In the face of everyday demands, choosing a retirement strategy for your business can become a casualty. The idea of establishing a plan could evoke worries about complicated reporting and administration.

If this sounds familiar, then you may want to consider whether a Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA) may be right for you.

A SEP-IRA can be established by sole proprietors, partnerships, and corporations, including S corporations.

The advantages of the SEP begin with the flexibility to vary employer contributions each year from 0% up to a maximum of 25% of compensation, with a maximum dollar contribution of $57,000 in 2020, and $58,000 in 2021.

Employees Vested

The percentage you contribute must be the same for all eligible employees. Eligible employees are those age 21 or older who have worked for you in three of the last five years and have earned at least $600 (in 2020) or $650 (in 2021). Employees are immediately 100% vested in all contributions.

There are no plan filings with the IRS, making administration simple and low cost. You only need to complete Form 5305 SEP and retain it for your own records. This form should be provided to all employees as they become eligible for participation.

Unlike other plans, a SEP may be established as late as the due date (including extensions) of your business’ tax filing (generally April 15th) for making contributions for the prior year.

A Menu of Choices

Each eligible employee will be asked to establish his or her own SEP-IRA account and self-direct the investments within the account, relieving you of choosing a menu of investment choices for the plan. The rules for accessing these funds are the same as those governing regular IRAs.

Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a SEP-IRA and other defined contribution plans. Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.1

Unlike the self-employed 401(k), which is only available to business owners with no employees, you cannot take a loan from your SEP assets. Under the SECURE Act, in most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 72. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.1

The SEP earns the “simplified” in its name and stands as an attractive choice for business owners looking to maximize contributions while minimizing their administrative responsibilities.

1. IRAs have exceptions to avoid the 10% withdrawal penalty, including death and disability.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Are You Ready for Your Portfolio to Make a Difference?

Are You Ready for Your Portfolio to Make a Difference?

Learn about the rise of Impact Investing and how it may benefit you.

What Does That Mean? IDK

What Does That Mean? IDK

Financial acronyms you should know.

Home Ownership by the Numbers

Home Ownership by the Numbers

Tips on home-buying for Millennials.

 

Have A Question About This Topic?







Thank you! Oops!

Why Medicare Should Be Part of Your Retirement Strategy

How Medicare can address health care needs in your retirement strategy.

How to Spend Again After Saving

When people save, it brings life rewards. But sometimes after being on your best money behavior for a long time, you want to cut loose and spend. It can happen whether you’ve been saving to buy a home, rejoined the workforce or survived a global pandemic.

Whole Life Insurance Can Be an Asset For Balance

Even if you didn’t grow up on a farm, you’ve heard, “Don’t put all your eggs in one basket.”

View all articles

Contributing to an IRA?

Determine if you are eligible to contribute to a traditional or Roth IRA.

Long-Term-Care Needs

Determine your potential long-term care needs and how long your current assets might last.

Bi-Weekly Payments

This calculator estimates the savings from paying a mortgage bi-weekly instead of monthly.

View all calculators

5 Smart Investing Strategies

There are some smart strategies that may help you pursue your investment objectives

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

View all presentations

Emerging Market Opportunities

What are your options for investing in emerging markets?

When Do You Need a Will?

When do you need a will? The answer is easy: Right Now.

What Can a Million Dollars Buy You?

$1 million in a diversified portfolio could help finance part of your retirement.

View all videos