For self-employed individuals with no employees, or even a small family owned business with few employees, a SEP IRA (Simplified Employee Pension plan) is definitely worth considering. A main with other retirement plans is the lower contribution limits. The Traditional and Roth IRA deposit limits in 2020 are $6,000 ($7,000 for age 50 and up) and the SIMPLE IRA is $13,500 ($16,500 at age 50 and up), but the SEP IRA contribution limit is 25% of gross earnings, or $57,000, whichever is less. The self-employed owner must make a special calculation factoring in the deductible part of their self-employment tax. Still, this plan provides the option to contribute a larger percentage of income to retirement savings, and the contributions are tax deductible.
Items To Keep In Mind
- All contributions are made by the employer.
- All employees must receive the same percentage of contribution based on their gross earnings.
- To be eligible, one must be 21 years old, must be employed three of the last five years, and have at least $600 in annual income.
- The employer may change the percentage each year based on profits (even to 0%) but must still give each employee that same percentage, including themselves.
- Employees may still contribute to their own Traditional or Roth IRAs in addition to a SEP.
- A distribution taken before age 59 1/2 has a 10% tax penalty, plus ordinary income tax, unless a qualified exception is met.
SEP plans can be used by a variety of small businesses, like a sole proprietorship, an LLC, a partnership, and an S corporation. Also, the SEP plan is free to set up, and like the name implies is simple to open and manage compared to the more complex and extensive maintenance involved with a 401(k) or similar business retirement plan. If a small business plans on remaining small with one or just a few employees, the SEP IRA can be a great tool to utilize for retirement saving and planning. Contact us to talk about a plan that bests suits your business’s needs.