Retirement Read Time: 3 min

Is a SEP-IRA Right for Your Business?

If you're like many small business owners, running your own business is an all-consuming endeavor.

In the face of everyday demands, choosing a retirement strategy for your business can become a casualty. The idea of establishing a plan could evoke worries about complicated reporting and administration.

If this sounds familiar, then you may want to consider whether a Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA) may be right for you.

A SEP-IRA can be established by sole proprietors, partnerships, and corporations, including S corporations.

The advantages of the SEP begin with the flexibility to vary employer contributions each year from 0% up to a maximum of 25% of compensation, with a maximum dollar contribution of $61,000 in 2022, and $66,000 in 2023.1

Employees Vested

The percentage you contribute must be the same for all eligible employees. Eligible employees are those age 21 or older who have worked for you in three of the last five years and have earned at least $650 in 2022 or $750 in 2023. Employees are immediately 100% vested in all contributions.1

There are no plan filings with the IRS, making administration simple and low-cost. You only need to complete Form 5305 SEP and retain it for your own records. This form should be provided to all employees as they become eligible for participation.

Unlike other plans, a SEP may be established as late as the due date (including extensions) of your business’ tax filing (generally April 15th) for making contributions for the prior year.

A Menu of Choices

Each eligible employee will be asked to establish his or her own SEP-IRA account and self-direct the investments within the account, relieving you of choosing a menu of investment choices for the plan. The rules for accessing these funds are the same as those governing regular IRAs.

In most circumstances, once you reach age 73, you must begin taking required minimum distributions from a SEP-IRA and other defined contribution plans. Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.2

Unlike the self-employed 401(k), which is only available to business owners with no employees, you cannot take a loan from your SEP assets. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.2

The SEP earns the “simplified” in its name and stands as an attractive choice for business owners looking to maximize contributions while minimizing their administrative responsibilities.

1. IRS.gov, 2022
2. IRAs have exceptions to avoid the 10% withdrawal penalty, including death and disability.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Retirement Income and the Traditional Portfolio

Retirement Income and the Traditional Portfolio

Experiencing negative returns early in retirement can potentially undermine the sustainability of your assets.

Understanding Extended Care

Understanding Extended Care

Understanding the types of extended care services—and what those services could cost—may be critical.

12 Financial Hacks for Millennials: Budgeting, Investing and

12 Financial Hacks for Millennials: Budgeting, Investing and

Millennials bear substantial potential, but they are also facing a world of great financial uncertainty and opportunity. This e-book presents 12 Financial Hacks for Millennials to guide them through....

 

Have A Question About This Topic?







Thank you! Oops!

How Can I Be a Confident Spender in Retirement?

Imagine you’ve been invited to go paragliding. It’s your first time and you’ve bought a top-of-the-line paraglider.

Insight to a Maddening Employment Report

Here’s why the August jobs report was particularly maddening.

8 Financial Lessons from the Big (and Little) Screen

Financial lessons from movies and TV.

View all articles

Annuity Comparison

This calculator compares a hypothetical fixed annuity with an account where the interest is taxed each year.

Paying Off a Credit Card

Enter various payment options and determine how long it may take to pay off a credit card.

What Is My Risk Tolerance?

This questionnaire will help determine your tolerance for investment risk.

View all calculators

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

Long-Term-Care Protection Strategies

The chances of needing long-term care, its cost, and strategies for covering that cost.

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

View all presentations

Encore Careers: Push Your Boundaries

Ready for retirement? Find out why many are considering encore careers and push your boundaries into something more, here.

The Latte Lie and Other Myths

Check out this video to begin separating fact from fiction.

Leaving Your Lasting Legacy

Want to do more with your wealth? You might want to consider creating a charitable foundation.

View all videos