Small Business Owners…What’s SEP??
This is shout out to all small business owners. What’s SEP? Have you ever heard of a SEP? What is it? How does it work? Who does it benefit? Why is it so important that all small business should have one?
In this post, I will shed some light all of the questions above. This is a basic overview. For a more detailed discussion, please contact me via email at Louis@louisromero.com.
Let’s get started.
What’s a SEP? A SEP is short for Simplified Employee Pension. This type of plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account (IRA) or Annuity set up for each plan participant (a SEP-IRA). A SEP_IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRA’s. (Source: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps)
For more information on what a traditional IRA is and how it works, visit my post “IRA – Traditional or Roth?”
Back to SEP’s. SEP’s work much like a traditional IRA in the sense that the growth of the principle invested is tax deferred. This means you, the account owner/employee, do not pay taxes on the funds until you withdraw them in retirement. What you are allowed to do is deduct your contributions from your current taxes. The current annual max contribution of IRA’s is $6,ooo under 50 years of age, $7,000 beyond 50. SEP’s/IRA are just half the job. Choosing the right investment vehicle to power you IRA/SEP is the joint critical component. I can definitely help you make the right decisions with this aspect as well.
So SEP’s grow tax deferred, big deal. The big deal has several benefits. One – As a small business owner or if you are self-employed as a second job, you can participate in both (you small business SEP and your employers’ retirement plan. Two – As a small business owner or self-employed, you can have both an individual IRA and a SEP IRA. This is an excellent method to add additional funds towards your retirement. Three – SEP have a much higher annual contribution limit. Currently, those limits cannot exceed the lesser of: 25% of compensation or $58,000 for 2021. The IRS adjust these numbers annually. Again, I reiterate, if maxing out your IRA $6,000 plus an additional potential $58,000 thru your SEP, that’s $64,000 tax-deferred growth potential in addition to lower your taxable income by $64,000. See why this is a BIG DEAL!!! Fourth and finally – the employer who sets up the SEP can deduct the contribution to the employee from the businesses taxable income. BOOM!!!
SEP’s and IRA’s are an excellent, legal method of lowering your taxable income on a yearly basis. These are systems have been put place for small business owners and self-employed business folks to take advantage of the tax code. Remember, it’s not how much money you make, it’s how much money keep.
Want more specific information on possibly opening up a SEP account for your small business? Contact me at Louis@louisromero.com. I can review your current situation and custom design an SEP that will best benefit you as the business owner and possibly your employees as well.
I look forward to hearing from you soon!!