We have discussed two different types of retirement plans for small business owners in the retirement plan series. Since there are so many people setting up individual LLC’s or home based side businesses, one type of retirement plan that can be set up during the calendar year or even up until tax time is the Simplified Employee Pension Plan (SEP). How can you determine if this is the right type of retirement plan for you and your small business?
Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay. (source: irs.gov) The good news is that any size business (even a business of one) can open up a SEP plan and there are no annual filing requirements, which can save time and money.
How does a SEP work?
Jed works for the Rambling RV Company. Rambling RV decides to establish a SEP for its employees. Rambling RV has chosen a SEP because the RV industry is cyclical in nature, with good times and down times. In good years, Rambling RV can make larger contributions for its employees and in down times it can reduce the amount. Rambling RV’s contribution rate (whether large or small) must be uniform for all employees. The financial institution that Rambling RV has chosen for its SEP has several investment funds from which to choose. Jed decides to divide the contribution to his SEP-IRA among three of the available funds. Jed, an employee, cannot contribute because SEPs only permit employer contributions.
I especially like the SEP plan for single owner businesses or business that will have cyclical cash flow, because there are no annual requirements for contribution or matching.
For 2013, contributions to an employee’s SEP-IRA cannot exceed the lesser of:
- 25% of the employee’s compensation, or
- $51,000
One of the nice features of this plan is that you can be fairly exclusive of new employees, especially if you own a seasonal business or have a business that generally has higher turnover.
An eligible employee (including a self-employed individual who received earned income) is an individual who meets all the following requirements:
- Has reached age 21
- Has worked for you in at least 3 of the last 5 years
- Received at least $550 in compensation from the employer during the year (for 2010 and 2011
Pros of the SEP Plan:
- Easy to set up and easy to administer
- You can set up a plan up to the time you file your taxes
- Flexible annual contributions
- Wide array of investment choices
- Employees can defer income
Cons of the SEP Plan
- Immediate vesting schedule
- Mandatory to contribute to employees when you contribute for the owner
- Owner must make contributions equal from a percentage perspective
Since most business owners aren’t well versed in retirement plans, I’ve noticed that they generally set up whatever their financial advisor or broker recommends. However, most of these salespeople aren’t an expert in retirement plans. Very few (including myself) hold the CRPS® Chartered Retirement Plans Specialist degree which is what I would look for if you want an advisor that has the expertise and knowledge of all the plans. That is a smart money move no small business owner can pass up, and if you need help go to www.oxygenfinancial.net and we will help you make the right retirement plan decisions no matter where you live in the country.
Published: August 14, 2013
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