Small Business Retirement: Debunking Some Common SEP Myths

False myths about simplified employee pensions may be keeping you from considering them. Here's why business owners should consider SEPs for employees.

Print Small business owner or freelancer? Consider SEP
3 min read

Small business owners sometimes use Simplified Employee Pension (SEP) IRAs to contribute money to their employees’ retirement, or even to their own.

But SEPs aren’t just for corporations. If you’re a freelancer, an independent contractor, a part-time business owner, or someone who earns income from side jobs, you may also be able to contribute to a SEP IRA, and many of the rules for investing, distribution, and rollover are the same as for traditional IRA accounts.

A number of myths have sprung up around SEPs, which might create confusion. That’s why Christine G. Russell, Senior Manager of Retirement and Annuities at TD Ameritrade, is busy debunking those myths.

SEPs: Getting Started

"One myth is that an SEP is hard to set up, but that’s not necessarily the case," according to Russell.

Setting up an SEP is as straightforward as answering a few questions about your plan, mostly about which employees you want to cover in your new SEP plan. If you don't have any employees, then you will only be making contributions for yourself.

If you do have employees, then merely inform them about the plan and ask them to set up their own personal SEP IRA account—just like you did. And it's into these accounts that you'll make the contributions. 

If you have employees for your business, you can limit your contributions to those employees who are at least 21 years old, have worked three out of the five previous years for you, and earned $600 in the current year. For part-timers, just one hour counts as a year’s service.

TD Ameritrade offers an online process that can walk you through the steps, or you can fill out an application by hand and mail it in. Which, by the way, debunks another myth about SEP plans—that you need to approach a CPA or tax advisor to set them up. You don’t. It might be a good idea, and you may choose to use one to set up your plan, but it's not required.

Fits Various Income Profiles

Another myth that stops some people from opening a SEP is the belief that they don’t have enough income to contribute. The beauty of the SEP, though, is its flexibility.

“The great thing with the SEP is you can change the percentage you contribute every year,” Russell said. “You can even skip years when you don’t have the money. You can even contribute once and never contribute again.”

Russell noted that a one-year contribution can be 25% of one’s income up to $53,000 for the 2016 tax year. That increases to $54,000 for 2017.

Have a Plan at Your Day Job? No Problem

Some think you can’t have a SEP for your side business if you already have a 401(k) from your full-time job. That’s another misconception.

"In fact, if either the 401(k) limits or your day job's salary have been limiting your retirement savings, SEPs can allow you to make a contribution for yourself based on your side business income," Russell said. But this might not be beneficial for your personal situation, so you should check with your tax advisor to make sure.

Like Profit Sharing

All the money contributed to the SEP comes from the employer, not the employee, who would only contribute to a personal IRA. Russell compared the SEP process to a profit-sharing plan.

There’s no limit on the number of employees who are eligible, so small or large companies can do this. Although, large companies might want to look at a 401(k) or profit sharing plan in case those plans are a better fit for the company's goals.

“If you open the account here at TD Ameritrade, you have a wide range of investments to choose from, similar to what you would have with a Traditional or Roth IRA.” Russell said.

Tax Benefit

Another benefit of the SEP is that it may be considered a business expense that may reduce the net profit of a company, potentially easing the tax burden.

“SEP is the only plan you can set up right now and get a tax deduction for 2016 if you have a 2016 tax extension. You have until your tax filing deadline, including extensions, to open a new SEP or contribute to an existing one. For calendar year filers like those who file a Schedule C or K-1 Form, October 16, 2017 is the 2016 tax and SEP deadline," Russell added.

TD Ameritrade does not provide legal or tax advice. Clients should consult with a legal or tax advisor with regard to their specific tax circumstances.

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Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different. TD Ameritrade does not provide legal or tax advice. Please consult your legal or tax advisor before setting up and contributing to your IRA.


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