SEP IRAs
Many small companies consider Sep IRAs for their businesses, because it affords them an opportunity to provide a pension plan when they do not have the resources for a more conventional program. Sep IRAs are simple to set-up, administer, and for participation, and hence the name: Simplified Employee Pension Individual Retirement Account. Sep IRAs work now for smaller businesses, and can also be rolled over into other forms of IRAs in the event the business owner becomes eligible for a different plan or if employment changes. Portability is an excellent feature of the program. Sep IRAs favor the small business with very low administrative costs, and in the case of the self-employed worker there are often no associated costs at all. The common rule for all Sep IRAs is on benefits, and requires that all employees of a business must receive the same benefits. It’s fairly easy to qualify employees to participate in Sep IRAs, since requirements are simple and straightforward. The employee must be at least 21 years old, have worked for the company three out of the last five years, and have earned a minimum of $450 in wages during the previous year. Companies setting up Sep IRAs for their business rarely have difficulty including their workforce. The ease of enrollment also encourages employee participation in the program. Most businesses select a mutual fund company to hold the account, and are then able to offer a variety of funds for the employee’s contributions. Each worker chooses the funds they want to invest in and a bit of easy paperwork completes their enrollment. Contributions to the plan are then made by the employer from the earnings of the employee. Instead of putting the money in the worker’s paycheck, it is deposited into the Sep IRA. Sep IRAs allow a maximum annual contribution of 25% of the total income of each employee, and the amount of compensation paid into the plan is tax deductable for that employee. This provides a tax savings for the participant. Sep IRAs have distribution rules that mimic those in a Traditional IRA. Distributions can begin at age 59 ½ years old, and are required to start no later than age 70 ½ years old. When these withdrawals start, they become taxable at the owner’s current applicable tax rate. For a person who is self-employed, the contribution is limited to 20% of earnings. The annual maximum contribution is calculated on the self-employed worker tax return, and is normally about 18.6% of net profit. Having the ability to offer a retirement plan as part of a benefits package can be a big advantage for small business owners, who may be able to attract a better quality and longer term worker when able to offer a retirement savings program. The flexibility of Sep IRAs also means there are no set contribution limits, and the business owner can designate a smaller contribution in a start-up situation and increase the amount and frequency as profitability increases. This feature incentivizes both the employer and his employees to maintain standards that will encourage better, steady profits. The employer makes the decision on what that compensation will be, between 0 and 20%, and can hiatus the program if necessary due to business conditions. True to the name, Sep IRAs are simple, and effective…simple to start and manage, simple to use with no required reporting to the IRS on annual reports. They are simply good business for the small company that would like to add benefits for employees, and help them build retirement wealth.
