Why a SEP IRA May Be Right for You

Estimated reading time: 2 minutes, 37 seconds

The Simplified Employee Pension (or SEP IRA) is an attractive retirement savings tool for entrepreneurs and small business owners. Any business owner with at least one employee can open a SEP IRA. This also includes any self-employed individual (and thereby anyone with freelance income, sole proprietorships and partnerships). Corporations, including S corporations, can also set up SEP IRAs.

According to the Small Business Administration, small businesses provide 55% of all jobs, 66% of all net new jobs since the 1970s and 30-50% of all commercial space in America. The number of small businesses in the nation has increased 49% since 1982.

Therefore, the SEP IRA is poised to be a go-to for a significant number of the nation’s 28 million small business owners, and if you’re among them, then you may want to consider a SEP IRA.

One distinguishing feature about SEP IRAs is that employees cannot contribute to the plan; only you, the employer, can contribute. A business owner’s contributions into a SEP IRA are tax-deductible, and you can also be discretionary with the contributions. That is, you can make smaller contributions during down years, or you don’t have to fund contributions at all if the company experiences a particularly rough year.

The contributions cannot exceed 25% of an employee’s compensation or $53,000 (for 2015)—whichever is smaller. The latter of those may change in subsequent years since it is subject to annual cost-of-living adjustments. For the self-employed, the IRS has a calculator to help determine contribution limits. These limits are significantly larger than contribution limits for a Traditional or Roth IRA. Those contributions go into a Traditional IRA held in each employee’s name, and the funds are not taxable until withdrawal, just like with Traditional IRAs.

The key word in the SEP acronym is “simplified,” as it is intended to be simple by requiring no IRS reporting or annual funding, is low-cost and is fairly easy to administer.

For an employee, you must be at least 21 and have worked for the employer in three of the last five years. Also, you must have received at least $550 in compensation annually. You must have established a Traditional IRA in which the employer will deposit SEP IRA contributions. Once those funds are deposited, they become Traditional IRA assets and are therefore subject to many of the same distribution, investment and rollover rules as Traditional IRA assets.

Hopefully, you’re now a little more familiar with the SEP IRA. Keep in mind that the above serves as a brief primer on the SEP IRA and should by no means be considered advice on whether this retirement savings vehicle is right for your individual situation. Kingdom Trust recommends consultation with tax and financial advisors prior to choosing a retirement plan for you or your business.

If you’d like to open a SEP IRA with Kingdom Trust, simply click here to open a new account online or visit Open & Fund My Self-Directed IRA for a PDF application, more on IRA contributions and distributions, and IRS forms such as the 5305-SEP.

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