Is a SEP IRA the Right Choice for Your Business?


According to the Department of Labor, more than one-third of U.S. workers do not have access to a workplace-sponsored retirement plan. As a business owner, the startup and operating costs of conventional retirement plans can make it difficult to offer quality savings options for your employees. Have you considered a Simplified Employee Pension (SEP) IRA?

A SEP IRA can work well in businesses that would otherwise not set up employer-sponsored plans; typically, sole proprietors, partnerships, corporations and sometimes even S corporations.

Benefits of a SEP
When using a SEP, you will experience:

  • A tax credit of up to $500 per year for three years
  • Low administrative costs
  • Non-taxable investment earnings to the employer
  • Limited or no government paperwork
  • IRA trustee(s) making investment decisions, not the employer
  • Trustee deposits contributions, sends annual statements and files all required documents with the IRS
  • Individual employees make specific investment decisions

How a SEP Works
SEPs are treated like traditional IRAs for tax purposes and allow the same investment options. The same transfer and rollover rules that apply to traditional IRAs apply to SEPs. SEP IRAs can receive employer contributions but with a higher annual contribution limit than standard IRAs. Think of a SEP IRA as a traditional IRA that lets your employer contributions be vested immediately.

When you contribute to SEP IRA accounts, you receive a tax deduction for the amount contributed. Additionally, your business is not locked into an annual contribution; each year you can decide whether and how much to contribute.

Contributions cannot exceed the lesser of 25 percent of an employee’s compensation for the year or $53,000. This is significantly higher than the $5,000 limit imposed on standard IRAs. These limits apply to your total contributions to the plan and any other defined contribution you have, like other SEP, 401(k), 403(b), profit-sharing or money purchase plans.

Other SEP Rules
Rules can be complex. The following are other criteria that must be followed:

  • Eligible employees must be at least 21 and worked in at least three of the last five years
  • All eligible employees must participate in the plan
  • Includes part-time and seasonal workers
  • Does not include employees who received less than $600 in annual compensation
  • Contributions for all participants generally must be uniform; for example, the same percentage of compensation
  • Also, your workers who are covered in a union agreement that bargains for retirement benefits may be excluded from participating in a SEP IRA. The same goes for nonresident aliens if they don’t receive U.S. wages or other service compensation.

Why Choose a SEP?
A SEP IRA might be a good choice for your company. You can change contribution amounts from year to year, enjoy low administrative costs and minimal government paperwork, and avoid many of the investment decisions. When considering a SEP, make sure the financial institution you choose to be the trustee has several investment options for your employees to pick from.

A SEP IRA can be a win-win for you and your employees: they get access to an employer-sponsored retirement plan, and you get a happier, more loyal workforce – and don’t forget the tax benefits!

Contact us to learn more about a SEP IRA and if it’s right for your business.


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