SEP plans are yet another type of tax qualified pension plan that one could use to accumulate monies for retirement on a tax favored basis.
The attraction lies in the higher-than-normal contribution levels, more so than found in other tax qualified plans.
They can be ideal for the self-employed.
What is a SEP?
SEP stands for Simplified Employee Pension Plan and can best be described as a retirement plan adopted by the employer, whereby the employer makes contributions into the employee's Individual Retirement Account - even if you are both the employer and employee.
Contribution limits are generally 25% of total annual compensation, not to exceed $56,000 for 2019 and $57,000 for 2020 or whichever is less.
Employee(s) must all have attained age 21 and have worked for the employer at least 3 of the preceding 5 years. Eligible employee(s) can only enter into the plan on the first day of the plan year.
Virtually all type of employers including sole proprietors, partnerships and corporations can establish SEP plans and, unlike SIMPLE 401(k) and SIMPLE IRA's, there's no restriction on the amount of the number of total employees.
Under current law, an employer may or may not contribute to a SEP plan in any given year, similar to a profit sharing plan.
And, this contribution is not discriminatory. It must be made in the same amount to all eligible employee(s), except for the sole proprietor or partners.
The benefits to a SEP plan, as with any other tax qualified plans, are eligible income tax deductions and tax-free growth until withdrawn. Distributions are taxed at ordinary income tax rates. Distributions made prior to age 59-1/2 could be subject to a IRS-imposed 10% penalty plus taxes.
Secondly, the contributions which are made into a SEP plan, are NOT includable in the employee's W2 income statements and are not subject to FICA or FUTA taxes.
SEPS are subject to top heavy testing obligations and, if it is found to be so (favoring key employees of high wage earners), then current law mandates a 3% minimum contribution on behalf of each participant who is not a key employee.
However, if there is only one employee (you), this becomes an irrelevant issue.
As with all tax qualified plans, one must follow the IRS prescribed guidelines and rules to ensure proper and legal funding. Calculations can be made by us or by your CPA or tax advisor.
If established and maintained properly, SEP plans are an excellent savings tool as they allow high annual contributions more than most other tax qualified plans. They are ideal and commonly found in small business situations.
Other Potential Advantages
Action To Take
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Fielder Financial Management, Ltd. not affiliated with Fortune Financial Services, Inc. Mark Fielder, Financial Professional, CA. Insurance Lic. # 0690576.