Self-employment can be a fulfilling experience, but it can also create a wide range of challenges. As a self-employed individual, you probably have your hands full. You have to serve your customers and prospect for new business. You have to keep a careful eye on your cash flow and bottom line. You may have employees whom you need to manage.
With so much responsibility, you may not have time to think about retirement. After all, you may have decades until retirement. You may think that your best retirement strategy is to focus on growing your business.
However, retirement is too big a financial challenge to ignore. There’s no guarantee that you’ll be able to work as long as you want or that you’ll be able to sell your business for full value. It’s always helpful to have retirement assets, and you may find that a retirement plan helps you attract and retain good employees.
A 401(k) plan may not be right for your business because of its high costs and administrative burdens. However, you have an alternative. It’s the Simplified Employee Pension plan, also known as a 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 account created for small businesses and self-employed individuals. It’s taxed very similarly to a traditional IRA. You can make tax-deductible contributions, and growth in the account is tax-deferred. Your distributions are taxable, though, and you could face a 10 percent penalty if you take a withdrawal before age 59½.
Most SEP IRA custodians offer a wide range of investment options, so you and your employees can choose the allocation that’s right for your goals and risk tolerance. If you ever leave the business, you can roll your vested balance into a traditional IRA.
One of the benefits of a SEP IRA is that it has a much higher contribution limit than other types of IRAs. 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
With a SEP IRA, 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 help you save for the future and reduce your tax bill today.
If you have employees, you may want to carefully analyze whether a SEP makes sense for you. You have to offer SEP participation 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 to the SEP. Instead, you contribute on their behalf. You have to 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 SEP IRA strategy? Let’s talk about it. Contact us at Sprouse Financial Group. 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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