SEP IRA Contribution

Rules And Limits To Starting: An SEP IRA Contribution

 
There are many benefits to being self-employed. Owning your own business is part of the American dream. Responsibilities come with accepting those benefits, especially if you have employees. You will need to offer competitive wages and benefits in order to retain the best talent. Offering benefits such as a retirement plan to each employee can add tremendous amounts to your budget. However, there are cost effective ways that you can use to lower your tax amount, and even save for your own retirement. One option is to make a SEP IRA contribution for both you and your employees. 

SEP stands for Simplified Employee Pension, and the general rules and associated tax liabilities attempts to live up to its name: as a simple retirement plan or simple ira for small business owners. Making a contribution to an SEP retirement account can significantly lower your taxable income. All dollars are pre-tax, just as they are with a traditional IRA or 401k. Also, the money in the account grows tax-deferred, so your business does not have to pay any taxes on IRA earnings. Traditional IRA rules apply, so be careful if you have to withdraw money before you reach retirement age. You will have to pay income taxes, and you will be assessed a penalty if the withdrawal occurs before age 59 1/2. 

Many small businesses have been especially hurt by the “Great Recession”. Meeting annual obligations can strain a business when the demand for products and services decrease. Fluctuating net income can put a benefit such as the retirement plan out of reach. Unlike other retirement plans, business owners do not have to make contributions to a SEP IRA each year. Also, you are not bound by the April 15 deadline to make contributions. 

You must provide the same percentage of a SEP IRA contribution to your employees as you do for yourself, based on their salary. Contribution limits for a SEP is up to 25 percent of the income reported on the W-2. General eligibility rules for employees are: 

• They must be older than 21; 
• have worked for your company for three of the five years that precede the contribution year; and, 
• have received $550 or more in compensation during that time. 

Employers will also be happy to know that opening an account and making a SEP IRA contribution for you and your employees is easy with the help of a financial advisor or financial institution.