Retirement planning

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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Estate Planning in Practice: Life Insurance Trusts


Estate planning is often a long and complicated process. Considering estate taxes could take up a significant portion of your assets after death, it’s good to know there are options to reduce or eliminate estate taxes.

One such option is a life insurance trust.


Need to Know

An irrevocable life insurance trust gives you more control over your insurance policies and the money that’s paid from them.

The basics of the trust are as follows:

  • The insurance trust owns the policies, not your estate
  • Estate taxes are reduced or even eliminated
  • The trust can buy extra insurance (also not include in your estate)
  • Proceeds not subject to probate or income taxes
  • Also free from estate taxes

Your family benefits by having the insurance proceeds available immediately after your death. This is an inexpensive way to pay estate taxes and other final expenses. And you can leave more money to your loved ones.


Major Components

There are three components to an insurance trust: the grantor, the trustee and beneficiaries.

Grantor: You set up the trust; therefore, you are the grantor. As the grantor, you select the trustee. You can be your own trustee, but know that you won’t receive the same tax advantages.

Trustee: The trustee manages the trust. He or she (or you) will purchase an insurance policy naming you as the insured and the trust as owner and beneficiary.

You want to choose someone who’s responsible and objective. Popular options for trustees are spouses, adult children and a bank or trust company. Whichever option you choose, make sure the trustee has the time and knowledge to properly administer the trust and ensure premiums are paid promptly,

When the insurance benefit is paid after your death, the trustee will collect the funds, make them available to pay estate taxes and other expenses — including debts, legal fees, probate costs, and income taxes due on IRAs and other retirement benefits. Then, the trustee distributes the remaining funds to the trust beneficiaries as you instructed.

 Beneficiary: Most people understand this term. The beneficiary is the person or parties to whom your assets pass after your death. You can typically change the beneficiary at any time before your death.



The following scenarios present some drawbacks when it comes to the trust:

  • If someone else owns a policy on your life and dies first
    • What happens: the cash or termination value will be in his or her estate, an unhelpful situation
  • If someone else owns the policy
    • What happens: you lose control of naming beneficiaries, plus the policy could be cancelled, its cash value taken or the policy garnished to satisfy the trustee’s creditors

The bottom line is that an insurance trust is safer because it allows you to reduce estate taxes and maintain control of your estate plan.


You’re in Control

With an insurance trust, your trust owns the policy. The trustee you select must follow the instructions you put in your trust. And with your insurance trust as the beneficiary of the policies, you will have more control over the proceeds. Maybe you could use the trust to provide your spouse with lifetime income and keep the earnings out of both of your estates. Profits that stay in the trust can be protected from courts, creditors, spouses and even irresponsible spending.



There are three basic restrictions you should be aware of:

  • There may be limits on transferring existing policies to the trust
  • If you die within three years, the IRS considers the trust invalid and proceeds are included in your taxable estate
  • There may be a possible gift tax

These trusts can be complex to set up and are not for everyone. On the other hand, a life insurance trust can be an effective way to reduce taxes and maintain control over your assets. If you think this might be an option for you and your family, call or email us and we can help you decide the best course of action.


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