What is a SEP IRA? Understanding the benefits and details of a SEP IRA before committing to this retirement savings vehicle.
Retirement Planning, Income Taxes
If you own a business and want to save for retirement, consider setting up a simplified employee pension individual retirement account. A SEP IRA can help both you and your employees set aside funds for the future. However, make sure your company and your long-term goals are a good match for this type of account.
I had the opportunity to share my thoughts on SEP IRAs with Rachel Hartman of US News & World Reports for her fine article titled, “What is a SEP IRA?” She lists much of the basics in her article, including Contribution Limits, Tax Benefits, as well as how to open a SEP IRA and the deadlines for “S” Corps (9/15) and “C” Corps (10/15). Since we have some deadlines coming up, I thought I’d promote her article again here in my blog. Here are my thoughts about SEP IRAs from the perspective of a business owner.
Advantages of SEP IRA:
- The advantages of a SEP IRA are that compared to other business retirement plans, they are much cheaper and easier.
- There is less paperwork and fewer forms; there is no need to hire a pension administrator or file Form 5500.
- You can also open and fund your plan later than you can with other employer retirement plans.
- SEP-IRAs don’t require annual contributions and the employer can decide each year whether to fund the accounts, and if so, how much to fund them, up the annual limits.
- Employers must contribute the same percentage of salary to each employee.
Disadvantages of SEP IRA:
- The main disadvantage of SEP IRAs is that they don’t allow the employee to save in them. Only employer contributions are permitted. So, the employee cannot save as much in a tax-qualified way as they could if their employer adopted a 401k.
- They also don’t allow loans, so employees can’t borrow against the balance of their accounts.
SEP-IRAs are used mostly in businesses with few relatively paid employees where the employees might not have much of an ability to save on their own. Employers also tend to use them when the cash flow of the business varies from year to year and the business owner is afraid to commit to a 401k.
With a SEP-IRA, the employer can open and fund accounts up to the tax filing deadline, including extensions. So, employers often open their initial SEP-IRAs when their CPA is doing their taxes and the CPA makes them aware of the tax benefits.
As you know, this year the deadline for 2019 contributions were pushed back to July 15th. If you filed for an extension, the deadline is September 15th for “S” Corps and Partnerships and October 15th for “C” corps and individuals. Check with us for more info on how a SEP-IRA could fit into your overall financial plan.
Please contact us if you’d like to discuss your financial plan. As always, hang in there.
My name is Mike Garry, and my company is Yardley Wealth Management, LLC. We are a fiduciary, fee-only financial planning, and wealth management firm in Newtown, Pennsylvania (that’s in Bucks County).
Our law firm is Yardley Estate Planning, LLC and is in the same place. We only do Estate Planning work and I am licensed in Pennsylvania and New Jersey.
If you’d like to talk about this or anything else, please reach out: 267-573-1019, [email protected] or @michaeljgarry