Opening and successfully keeping a small business afloat is no easy feat. For someone who may not have the extra time or personnel to delegate to, taking the time to shop for a retirement plan for yourself and your employees may seem like a daunting and time-consuming task. What if we told you it is simpler than you think? The IRS has established a few plans, one of them being the SEP IRA, also known as the Simplified Employee Pension IRA.
The SEP IRA was designed with the self-employed and small business owners with few to no additional employees in mind. All that is required to set one up is an EIN # for your business, the one-page IRS 53505-SEP form filled out to be shared with eligible employees, and a bank or other financial institution to open your retirement account(s). Eligible employees must be included in the plan if they meet the following criteria:
- They are 21 years old.
- They have worked for you in at least three of the last five years.
- Have earned $600 in compensation from your business for the year.
The SEP plan is flexible, as the plan owner you could set the eligible age to as young as 18 years old or require only six months of employment to qualify.
SEP IRAs are like Traditional IRA accounts in that all contributions made are tax deferred. Contributions are solely made through employer non-elective deferrals. However, if the SEP plan permits, you and your employees can still make employee elective contributions akin to the standard IRA limits ($6,000 for 2020) to the SEP account; or you could make contributions to your own personal Traditional or Roth IRA accounts. The same percentage of contributions must be made across the board for yourself and your eligible employees. For 2019, contributions can be made up to 25% of compensation/salary, the maximum amount capped at $56,000. Going in to 2020, it will be capped at $57,000.
Other advantages for this type of account include no minimum contribution requirements, and they can be made throughout the year and/or after the year ends but before April 15th of the next year. This is beneficial for when cash flow can be an issue. Plus, you can continue to make contributions if you keep working past the age of 72. Another bonus is that contributions are tax-deductible for the lesser of either your contributions or 25% of compensation (subject to a $285,000 compensation cap).
Depending on which bank or financial institution you choose to open your plan with, your retirement funds can be invested in any kind of security, including stocks, bonds, mutual funds and exchange traded funds. If you are interested in alternative investments, such as cryptocurrency, gold, real estate, etc. there are also self-directed IRA custodians out there that can facilitate those types of investments for you, including Preferred Trust Company. Visit Preferred Trust’s website to see all of the opportunities at your fingertips when investing with a self-directed IRA. Contact them with any questions you may have about self-directed SEP IRA’s by dialing 702-990-7892 or shooting an email firstname.lastname@example.org.
As you can see, starting a savings plan for your business does not have to be complicated, and the benefits outweigh the few hours spent getting one started. Your future self and your employees will thank you in the long run.