SEP IRAs | Is This The Plan For You?

Planning for retirement can be quite the arduous task, especially for a small business owner who is attempting to plan retirement options for all his employees. While many business owners opt for what is known as a Simple IRA plan, many are turning toward SEP IRAs in order to suit their retirement needs. The SEP IRA, otherwise known as a Simplified Employee Pension Individual Retirement Account, is a knock- off of the traditional IRA account (which was inducted in 1982) and it is used widely among American business owners. SEP IRAs are typically associated with other IRA rules and regulations so you can invest and treat them in a similar manner. Let’s look a little more in depth at the make- up of these IRA accounts:

Contribution limitations are among the first questions asked about SEP IRAs. Different IRAs come with different limitations and SEP accounts are looked at as a ‘profit sharing’ plan. Employers have the option of contributing up to 25% of each employee annual wages! This makes for one of the easiest ways to save for retirement if you are a worker. For example, if you make $80,000 per year your employer can contribute up to $20,000 (25%) to your SEP IRA account. Contributions are cut off each year on the day that their tax return is due.

If you happen to be self employed then SEP IRA limitations are a little bit tougher to get through. You do not have a 25% limit on your contributions but you do have a stricter guideline- 18.58% of your net profit can go into your IRA account; which means 18.58% of every dollar your business brings in you can put away for retirement.

Another limitation with SEP IRAs are as follows:

  • Each worker who is benefiting from an SEP IRA account must be at least 21 years old
  • Each worker must have worked for the employer for at least three of the past five years
  • Each worker must receive at least $450 each taxable year
Now that we have dealt with contribution limits, let’s look a little bit at the unique FICA tax on SEP IRAs. This is where it gets a little bit more complex: All SEP contribution limitations are calculated off of the net profit of a business and the adjusted taxable deductions for self employment tax. Which, when all of the calculations are done (half of the FICA tax on net earnings) it comes out to around 93% of net profit.

SEP IRA accounts are one of the best options for small business owners to look into. They offer a pretty easy solution to retirement plans for most employees and while they are not as easy as Simple IRA accounts, they are an easy to manage retirement option.