Understanding SEP IRAs for Small-Business Owners

When you first start a business, you may be too busy thinking about immediate tasks — buying equipment, setting up your website, finding customers — to worry much about your retirement. But, as your enterprise grows, looking after your personal long-term financial stability should become one of your top priorities.

Small-business owners have various options when it comes to retirement savings. These include traditional and Roth IRAs, which are available to tuck money away on a tax-deferred or tax-exempt basis. However, their contribution limits are often too restrictive for entrepreneurs with growing incomes.

An attractive alternative is a Simplified Employee Pension Individual Retirement Arrangement, or SEP IRA for short. A SEP IRA allows a small-business owner to make retirement contributions to his or her own retirement plan, as well as to company employees’ plans.

The benefit of a SEP IRA over a pension plan such as a 401(k) is that it requires far less administration and paperwork to set up and monitor. Only employers contribute to an employee’s SEP plan. The SEP IRA contribution limit for employees for 2013 is 25 percent of the employee’s gross salary, up to $51,000.

If your business is unincorporated, the contribution limit for your own personal SEP IRA is a little more complex, because it must take into consideration the self-employment taxes you pay. The limit works out to about 18 percent of your net profit

To set up a SEP IRA plan, you simply open IRAs for yourself and your employees. If you already have an IRA that accepts SEP contributions, you may contribute to your existing plan. Contributions are excluded from the taxable incomes of plan holders, but any withdrawals before retirement are fully taxable. (Just like a regular IRA, if funds are withdrawn before the plan holder turns 59 1/2 years old, there will also be a 10 percent early withdrawal penalty.)

All eligible employees must be allowed to participate in the plan. Eligible employees are defined as people 21 years or older who’ve worked for you either full- or part-time for three of the past five years and have earned at least $500 in the current year.

As your small business flourishes and you earn more money from it, you can save significant amounts for your retirement with a SEP IRA. These plans also enable you to offer your employees a lucrative benefit, which may help you attract talent both now and in the future. Why not make SEP IRAs an integral part of your company’s strategic plan?

About Angie Mohr

Angie Mohr is a Chartered Accountant, Certified Management Accountant, and financial consultant. She has worked with thousands of clients over the years from mom and pop startups to rock bands and celebrity chefs. She is the author of the best-selling Numbers 101 for Small Business series of books and writes for Forbes, MSNBC, the Globe & Mail, Yahoo! Finance, Investopedia, and Motley Fool, among other financial publications. Her new book, Piggy Banks to Paychecks, helps parents teach their children how to be money smart. She splits her time between Canada and the United States and currently lives by the ocean with her husband and two children, who have finally learned that money doesn’t grow on trees. For more, go to www.piggybanks2paychecks.com.
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2 comments
DhavalVJantiya
DhavalVJantiya

I am a having a business and I do agree with your view and I personally think about my future and to secure future I am doing saving and investments in mutual fund and fixed deposits. My dad always say if you earn any amount keep 10% for the person who needed means for donation and keep 20% for saving........ This practice give me peaceful sleep every night.