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

Learn the SEP-IRA rules, contribution limits, and how to take advantage of this situation.

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),” said 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)s. 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 $58,000 for the 2021 tax year (contributions can be made until the business’ tax filing date, including through the extension date (if you have one). For 2021, that extension date may be as late as October 17, 2022. For the 2022 tax year, it goes up to $61,000, 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 for small businesses with under 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. Usually the firm you open your SEP-IRA with will report contributions on IRS Form 5498 and distributions on IRS Form 1099-R similar to Traditional IRA reporting practices.

Tick-Tock, Tick-Tock, Tick-Tock

The SEP-IRA contribution deadline is somewhat flexible. A new plan must be opened before the tax return due date, which for sole proprietors is generally April 15. If you file an extension with the IRS, sole proprietors may be able to open a new SEP-IRA as late as October 15 (October 17, 2022 for 2021 plans). For small businesses, the deadline depends on their fiscal year and whether their company is a sole proprietorship, partnership, or a type of corporation. For example, if your business is a “C” Corporation and 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 like the Retirement Selector tool can help you compare different types of business retirement plans. And the TD Ameritrade Contribution and Eligibility Calculator allows you to model plan contributions and decide which of your employees must be covered under your plan. And check out this SEP-IRA Guide for more information.

Although living in the present is important, consider carving out some time now to plan for your future financial well-being. 

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