Busy Small Biz? Consider Simplified Employee Pension (SEP IRA)

SEP IRA, of course! Learn what the SEP IRA rules, contribution limits, how to take advantage of this situation from TD Ameritrade.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Small business: Simplified employee pension SEP IRA
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As a small business owner or sole proprietor, you may be the one who manages it all—sales, marketing, customer service, billing, and quality control. While being the chief cook and bottle washer has its benefits, it also means lots of competing demands on your time. Planning for retirement can get lost in the shuffle.

It’s important to carve out time to plan for tomorrow. A Simplified Employee Pension plan, also known as a SEP IRA, is one way self-employed individuals, like yourself, can start building a financial future. 

"Many people don’t realize the benefits of a SEP IRA. Often small business owners and sole proprietors don’t have easy access to 401(k) plans, or don’t want to deal with the administrative burden of a 401(k)," says Matthew Sadowsky, director of retirement and annuities at TD Ameritrade.

The SEP IRA contribution limits are generally higher than those for traditional IRAs and large company sponsored 401(k) plans. And getting started requires minimal paperwork. Plus, the contributions are tax deductible. By investing in your future, you may also reduce the income taxes you’re paying today.

SEP IRA Rules, Key Features

Are you a sole proprietor, independent contractor, or freelancer?

  • A SEP IRA can give you the flexibility to increase or decrease contributions according to fluctuating income levels.
  • You can contribute up to 25% of your annual income, up to $54,000 for the 2017 tax year (contributions can be made until April 17, 2018, or an extension date, if applicable). For the 2018 tax year, it goes up to $55,000, and again, you can make contributions until the following April or applicable extension date. 
  • Just like traditional IRAs, you don’t pay any federal income taxes on dividends and capital gains until you take money out of the SEP IRA.

Are you a small business owner?

  • A SEP IRA may also be a good option for small businesses with up to 100 employees, but any size company is allowed to have one. Larger businesses should explore whether another plan may better meet their needs.
  • As the employer, you’re not locked into making a contribution each year, and you can decide whether and how much to contribute to employees’ accounts. But if you do, you must contribute the same percentage of compensation for each employee.
  • SEP IRAs offer streamlined administration and there are no plan tax filings with the IRS.

Tick-Tock, Tick-Tock, Tick-Tock

The SEP IRA contribution deadline is somewhat flexible. A new account must be opened before the tax return due date, which for sole proprietors is generally April 15 (April 17 this year). If you file an extension with the IRS, you may be able to open a new SEP IRA account as late as October 15. For small businesses, the deadline depends on your fiscal year. For example, if your fiscal year end is December 31, the tax filing deadline would be March 15, and a six-month extension could run through September 15.

Taking the first step toward your future retirement isn’t as hard as you may think. Online tools such as this TD Ameritrade retirement calculator can help you determine where you are on your retirement journey, and specialists are available to help you understand the different types of retirement plans.

Although living in the present is important, consider carving out some time now to plan for your future financial well-being. Then get back to work. Those dishes aren’t going to wash themselves.


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