There are many forms of retirement plans available for business owners, but some focus more on the small- and sole-business owner than others. One of those is the Simplified Employee Pension (SEP) plan.
As a sole proprietor or small business owner with fewer than 100 employees, an SEP might be a good choice for you.
Why an SEP?
An SEP is only available to small business owners; large companies may not participate in these plans. It also allows for employers to contribute to traditional IRAs for themselves and employees. It’s often a nice benefit small business owners may offer employees to help retain and attract the qualified and quality employees they seek.
Simplified IRA Pros and Cons
Now that you know more about a simplified IRA, here are some pros and cons about using one in your business.
- Easy to set up. You won’t be tied down completing a huge application process to get thing started. In fact, you could call a financial brokerage to help you get started.
- Easy to maintain. When it comes to year-end, IRS statements lack the complexity of other IRAs.
- Employer and employee benefit. Because the employer matches a certain percentage of the employee’s contribution, the employee gets more money toward retirement. The employer gains additional tax deductions from their taxable income for every dollar contributed.
- Higher early withdraw percentage. With most IRAs, when a person chooses to take an early withdraw, he/she has to pay about a 10 percent penalty fee. However, with an SEP, those withdrawing could get hit with a penalty as high as 25 percent.
- Cannot transfer balances. Unlike with a traditional IRA, where you may rollover amounts into other accounts, and SEP does not allow for the transfer of money from one account to another.
- Lower contribution limits. Some other retirement plans allow for higher contribution limits. However, each employee’s SEP contributions are limited.
How to Setup an SEP
Setting up an SEP is easy. You may contact a financial broker or CPA firm that specializes in SEPs to help you.
- Employers must complete, submit, and retain an IRS Form 5305-SEP to create the plan.
- After creating a SEP-IRA account for each qualified employee**, you must notify eligible employees of the plan.
- Once created, the company must make equal contributions for each employee, as a percentage of their compensation.
Move Your Company Forward
If you’re thinking about a retirement plan for yourself and/or your employees, let’s talk about how an SEP might be right for you.
For more information about SEP plans, visit the IRS website; then give Lang Allan & Company a call. We are here to help you move your company forward.
** Qualified employees are those who have reached age 21; worked for the company for at least three of the past five years; and received at least $550 in compensation from your business for the year.