The Government comes up
with letters to shorten various programs in all areas of finances. You have heard of IRA (Individual Retirement
Account) and 401k, a special retirement plan.
Have you ever heard of SEP? This
is short for Simplified Employer Pension.
This plan can best be described as a midpoint between and IRA and a 401(k). So let’s begin by discussing the general
parts of Retirement Plans for the self-employed.
Any individual full or part-time can establish a self-employed retirement plan. However, be careful of the guidelines for
maximum contributions, especially if your spouse is covered by a plan at their work. Sole proprietors and partnerships are also included. The main point is
that these plans differ from IRAs in which you contribute $5,500 each year
($6,500 if over 50). Self-employed plans allow you to contribute as
much as $53,000 annually with a new plan (IRS approved) allowing even greater
contributions. More about that in later
blogs.
Most of your contributions
are tax-deductible with all earnings growing tax-deferred. When withdrawn they are taxed at ordinary
income tax rates, not capital gains.
Much like your IRA, there is a 10% penalty tax for early withdrawal
before 59 and ½. Yet there is an exception. Under
Section 72t, the IRS allows you to withdraw equal and periodic payment before
59 ½ without penalty.
Self-employed plans can
frequently be rolled over to another plan or even your own IRA. Most all of such plans can be opened at
various financial institutions. Please understand
that one must initiate the plan before year’s end. You do not have to make your full allowable
contributions but merely make a minimum deposit (often as low as $250) and approve the paperwork. It would be drafted to
include both you and your employees.
Next we’ll discuss the three
most common plans, SEP-IRA, Simple IRA, and solo 401(k).