What to Know About the SEP-IRA

An employer-sponsored retirement plan can be a great way for employers to show workers they care about employees' long-term financial prospects while giving workers a way to save on their taxes.
 

A simplified employee pension (SEP) plan lets business owners and self-employed individuals use a simple way to make contributions for retirement savings. SEP-IRAs come with streamlined rules that make them less onerous to set up and administer than are 401(k) plans and more complex choices.
 

Let's see how they work:

  • Employers are responsible for setting up SEP-IRAs for employees. Self-employed workers play the role of employer and employee.
  • SEP-IRAs resemble other types of traditional IRAs. Money put into a SEP-IRA isn't included as income to the employer. (Employees themselves do not contribute unless, as noted, they are their own employers.)
  • Investments in a SEP-IRA are tax-deferred, meaning that you don't have to pay taxes on any income or gains that those investments generate until you make withdrawals from the SEP-IRA.
  • Employers can contribute as much or as little as they want each year. There is a maximum, which usually changes each year. The current limit is 25 percent of an employee's salary, up to $56,000. That's much more than allowed for in alternatives like SIMPLE IRAs and ordinary individual retirement accounts. For high-income individuals, it's hard to match what SEP-IRAs allow.
  • It's easy to set up a SEP-IRA. Most financial institutions make the paperwork uncomplicated, and the IRS offers a standard form — Form 5305 — to establish a SEP-IRA.
  • But there's one thing to keep in mind — if you're a business owner, you can't make huge contributions to your own SEP-IRA without making equal percentage contributions to employees' SEP-IRA accounts as well. (There are some relatively minor exceptions to this.)

 

In many ways, SEP-IRAs work just like a traditional IRA:

  • Withdrawal of funds prior to age 59½ may be subject to penalty and taxes, except in certain special circumstances.
  • You can't borrow from a SEP IRA as you can from many 401(k) plans.
  • You can roll your SEP IRA assets into another IRA account.
  • You can roll assets from another retirement account into your SEP IRA.
  • You must take required minimum distributions from a SEP IRA beginning at age 70½.
     

SEP-IRAs make it easier to help employees save for retirement. They have far fewer requirements than alternative pension arrangements. It could be a good move for your small business, even if you are the only employee.
 

However, the choice of a retirement plan at your business is an important one. The tax and financial implications can be substantial, and there may be other restrictions and provisions. Also, your decision can have a substantial effect on employee satisfaction. Consult with professionals to make sure you establish the right plan for your business.

Copyright 2019

 

Brookfield 
295 Regency Court, Suite 104
Brookfield, WI  53045

414.751.6847

Middleton
2501 Parmenter Street, Suite 100B
Middleton, WI  53562

608.824.3002

Sauk Prairie
421 Water Street, Suite 111
Prairie du Sac, WI  53578

608.644.0206