SEP IRA: Best Retirement Plan for Entrepreneurs and Employees

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Thinking about starting your business? Or maybe you have started your business already and need some help planning for your retirement. If you are an entrepreneur and you have just started running your business, retirement planning will be the last thing on your mind. You may be interested to know that planning and saving for your retirement is not that complicated. Have you ever heard of a Simplified Employee Pension Plan, also known as SEP IRA? With this type of investment account, you can set funds aside for your employees. Read more and find out why it is one of the best retirement plans for employees and entrepreneurs.

Why Open Simplified Employee Pension Plan?

There are many advantages to considering this pension plan for you and your employees.

  • A SEP-IRA account works more or less like a profit sharing program.
  • It is the perfect way to invest your hard earned money. It is inexpensive, easy to set up and maintain.
  • The contributions are made on a pre-tax arrangement.
  • Less complicated and no administration headaches. No IRS filing, thus more time to work and concentrate on other profitable business issues.
  • Simplified Employee Pension Plans are flexible. They can be used for any business size: sole proprietor, partnership or a corporation.
  • The amount you contribute varies every year.

Eligibility Requirements

There are certain requirements that must be met for one to qualify or participate in SEP-IRAs. The minimum age is 21years and the employee must have worked at the company for three out of five years. The employee must earn a minimum of $500 for the tax year. These limits are set by the government, and it is standard procedure to complete IRS form 5305-SEP when you set up your account. Completing the form is easy and you do not have to send it to the IRS. It is basically for your company records.

Tax Benefits

Earnings under SEP-IRAs are tax deferred. The contributions under this pension plan are not subject to taxes such as the federal income tax and/or federal unemployment tax. Any withdrawal after 59 and a half years will be subject to income tax.

Contributions to A SEP-IRA

It is the sole proprietor or the owner of the business who decides how much to contribute to SEP-IRA in any given year.

If it’s a corporation, between zero and 25% of compensation must be contributed to the plan annually. The eligible employees will get the same contribution.

Sole proprietors on the other hand do not have employees. Their contribution is about 18.6% of the business net profit. This still falls within the zero-25% range.

Steps To Open a SEP-IRA Account

Below are the simple steps you need to go through in order to set up a SEP-IRA account;

  • Complete an IRS form 5305-SEP for your business records.
  • Make sure you are within government eligibility requirements. Your employees must be made aware of these eligibility requirements.
  • It is your responsibility to fund the employees’ accounts.
  • Your employees must have their own accounts – it is easy to open an account. Simply answer some easy questions online.
  • As the business owner, you determine how much you are going contribute for your employees. The deadline is on Arpil15 of the following year.
  • It is your duty to tell your employees that their accounts have been updated.
  • Manage your accounts well and keep a record of how much contributions have been paid.

It is very easy to get started. As long as your business is registered, you can set up your SEP-IRA account without any complications.