SEP-IRAs may very well be
an attractive option for the self-employed business owner. It is similar to a Profit Sharing Plan in a
401(k) but much easier to establish and administer.
The employer establishes
the plan (one document) and sets up plans for each employee. The employee then decides who their
beneficiary will be and what investment option to choose from. When the employer makes contributions to the
plan they are general a tax-deduction to the employer and the employee does NOT
pay taxes on these contributions. The
reason being it is within a Qualified Plan, approved by the IRS. Thus, it is non-taxable contribution and also
grows tax-deferred. Much like other
qualified plans such as 401(k) and IRAs, there is a 10% penalty for early
withdrawal before Age 59 and 1/2. However,
that penalty is waived if monies are used for first time home buyers, or cannot
pay medical expenses or are currently unemployed. Distributions must begin at Age 70 and ½.
There are limits on the
contributions. Employers can only
contribute the LESSER of $53,000 or 25% of the employee’s salary (2016). While very easy to administer (no Third Party
Administrative fees), there are three qualifying factors for employees to participate
in the plan. Employees must be at least
21 years old, must earn at least $600 annually and must have worked in the
business for three of the last five years.
Most well-known companies
may be used for investment options. So there are options for the most conservative to the most growth oriented employee. Additionally,
employees who qualify are fully (100%) vested in the plan. Meaning that if they leave the business, they
can take the account assets with them.
So the SEP-IRA (Simplified
Employer Pension IRA) may be the most attractive solution for your business. Next up is a summary of SIMPLE IRAs.