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.

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https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Retirement: Small business owner or freelancer? Consider SEP
8 min read

Key Takeaways

  • Opening a Simplified Employee Pension is a relatively straightforward process, and contribution amounts can be flexible up to the annual cap
  • Many of the SEP rules are the same as those for traditional IRAs
  • Small business owners with a tax extension for 2017 could still open and contribute to a SEP and get a 2017 tax deduction through Oct 16, 2018

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. So let’s debunk some of those myths.

SEP IRAs: Getting Started

One myth is that a SEP is hard to set up, but that’s not necessarily the case.

Setting up a SEP is as straightforward as answering a few questions, mostly about any 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 accounts—just like you did. You’ll make the contributions into those accounts. 

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 to open an account, or you can fill out an application by hand and mail it in. This, 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 do so, but it’s not required. 

Small Business Retirement that 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. You can change the percentage you contribute every year. You can skip years when you don’t have the money. You could even contribute once and never contribute again.

Note that a one-year contribution can be 25% of one’s income up to $54,000 for the 2017 tax year. That increases to $55,000 for 2018.

Need help modeling contributions for yourself or your employees?  Try our NEW TD Ameritrade tool: Small Business Retirement Contribution & Eligibility Calculator.

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. 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. In that regard, the SEP contribution process is similar to that of a profit-sharing plan.

There’s no limit on the number of employees who are eligible, so it works for small or large companies. (Although larger companies might want to look at a 401(k) or profit-sharing plan in case they are a better fit for the company’s goals.) And try our NEW Contribution & Eligibility Calculator tool if you want to see which of your employees would be eligible for your SEP and how that might affect your plan contributions.

If you open the SEP account at TD Ameritrade, you’ll have a wide range of available investments, much as you would have with a traditional or Roth IRA.

Tax Benefit

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

A SEP IRA is the only plan you could still open, contribute to, and get a tax deduction for 2017, assuming you have a 2017 tax extension. You have until your tax filing deadline, including extensions, to open a new SEP or contribute to an existing one. If you’re a calendar year filer (so if you file a Schedule C or K-1 Form, for example), the deadline is October 16, 2018, for setting up and contributing to a SEP.

It’s the only small business retirement plan where you could still get a 2017 tax deduction this late in the year, even if you don’t have a plan already set up (but again, only if you have a 2017 tax extension).

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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