At Preferred Trust Company, we understand that starting a self-employed or small business, and successfully keeping it afloat, is no easy feat. We also understand that as an entrepreneur, you may not have the time or personnel to delegate to help you shop for things like a retirement plan. What if we told you it's a lot simpler than you think?
It's time to take your retirement goals off the backburner and take advantage of the plans the IRS established for hardworking people like yourself! One plan you may want to consider is the SEP IRA, also known as the Simplified Employee Pension IRA.
The SEP IRA was designed for the self-employed and small business owners with few to no additional employees. All that is required to establish a SEP IRA is an EIN # for your business, the one-page IRS 53505-SEP form completed to be shared with eligible employees, and a custodian 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's 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 ($6,500 for 2023) 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 2023, contributions can be made up to 25% of compensation/salary, the maximum amount capped at $66,000. For 2022, it was capped at $61,000.
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 the IRS tax filing deadline, of the next calendar 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 $330,000 compensation cap in 2023, compensation capped at $305,000 in 2022).
Depending on which custodian 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, like Preferred Trust Company, that can custody those types of investments in a retirement account.
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.
For more information about SEP IRAs, visit the irs.gov for SEP IRA retirement plan FAQ.