SEP Plans Can Help Business Owners Boost Retirement Savings

If you’re self-employed and looking for a simple and efficient way to save for retirement, consider a Simplified Employee Pension (SEP) plan.

Who’s qualified?

Anyone with self-employment income can establish a SEP, even if already covered by a retirement plan at a full-time job. This includes sole proprietors, partners in a partnership for which a plan is established, and small business owners.

What are the tax benefits?

Contributions to SEPs are tax deductible and grow tax-deferred. In addition to the tax deduction for your contribution, which lowers your tax bill, you benefit from the tax-deferred status of the investment earnings within your SEP. Those earnings continue to grow tax-deferred until withdrawn, generally at retirement, when your distributions are taxed as ordinary income.

SEPs are flexible 

A SEP does not require mandatory annual contributions, so in a year when business has been slow, you can contribute a lower percentage or none at all. And unlike traditional IRAs, you can continue to contribute to a SEP after you reach age 70½, as long as you still have earned income.

Another advantage of SEPs is the timing. You can establish and contribute to a SEP as late as the filing date, with extensions, for your tax return.

With employees, come added requirements

If you hire employees, in any given year in which you make a contribution to your own SEP, you are required to contribute the same percentage to SEPs for all eligible employees. Eligible employees are those who (1) are at least 21 years old; (2) have worked for you in at least three of the previous five years; and (3) have received at least $600 in compensation from your business during the year.

Unlike many other retirement plans, SEP participants are immediately 100 percent vested and have full ownership rights to the funds you contribute on their behalf.

SEP distributions follow traditional IRA rules

For the purpose of distributions, SEPs follow the same rules as IRAs. You must begin taking distributions from your SEP when you reach age 70½. Withdrawing from a SEP before you reach age 59½ generally results in a 10 percent penalty, in addition to paying income tax on the withdrawn amount.

A CPA can help you figure it all out

A CPA can help you determine if a SEP is right for your business. Consult with a CPA for advice on opening and administering a SEP plan.

(Updated and reviewed)

Copyright 2006, The American Institute of Certified Public Accountants