Own your own business? If so, you’re probably juggling many different challenges. You have to provide service your customers, find new clients and manage your company’s cash flow. You also may have to manage your employees, develop new products and services and work to achieve your long-term goals. As a business owner, you probably wear many different hats.
With so many challenges on your plate, retirement may not be on your radar. If you’re like many business owners, you may think you can work as long as you want. Many self-employed individuals funnel their energy and resources into their business rather than plan for the future.
However, retirement is one challenge you may not want to ignore. It’s not a given that you’ll be able to work forever, and you may not be able to sell your business to fund your retirement. It’s always helpful to have assets set aside for retirement. Also, a business retirement plan may be a helpful tool to attract new employees.
Many traditional employees use a 401(k) plan to save for retirement. Unfortunately, such plans are often too costly and burdensome for a small business or solo entrepreneur. The good news is you have an alternative—the Simplified Employee Pension plan, or SEP IRA. Below are a few tips on how the SEP IRA can help you and your employees prepare for retirement:
SEP IRA Basics
A SEP IRA is a qualified retirement savings vehicle for small businesses and self-employed individuals. It’s taxed similarly to a traditional IRA. You can deduct your contributions, and all growth is tax-deferred. Your distributions are taxed as income, and you could face a 10 percent penalty if you take a distribution before age 59½.
Most SEP IRA custodians offer a wide range of investment options, so you and your employees can each choose the allocation that’s right for your goals and risk tolerance. If you leave the business in the future, you can roll your SEP IRA balance into a traditional IRA.
One of the appealing factors of a SEP is that it has a much higher contribution limit than a traditional IRA. These higher contributions could help you quickly accumulate a sizable retirement nest egg.
In 2018 you can contribute as much as $5,500 to a traditional or Roth IRA. That limit increases to $6,500 if you’re age 50 or older.1 However, you can contribute up to 20 percent of your net income to a SEP IRA, with a maximum allowable contribution of $55,000.2 Keep in mind that these contributions are tax-deductible, so they can have a big impact on your current taxes as well as your financial stability in retirement.
The SEP IRA isn’t just for business owners. Employees can participate too. In fact, you have to open up the plan to any employee who is at least 21 years old, earned at least $600 in the past year and has worked for you in three of the last five years.3
Employees don’t make their own contributions. Instead, you must contribute the same percentage of their income as you contribute for yourself. For example, if you contribute 5 percent of your income to the SEP, you must also contribute 5 percent of each participating employee’s income.
Contributions to the SEP are discretionary, so you can pause them in a given year if cash flow is tight. If you don’t make contributions for employees, however, you also can’t make them for yourself.
Ready to develop your retirement income plan, and find out more about how to incoprporate a SEP IRA strategy? Let’s talk about it. Contact us at Heritage Financial North. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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