SEP-IRA - what is it?
Ok, this is going to be boring. We get it. It's a blog article on a different IRA vehicle. I mean, c'mon. What can we even do with this?
We're going to make this as practical and applicable as possible. Therefore, we will define things generally and then immediately tell you how it will help you.
A SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement) is a retirement account. It's an account you use to save money to retire, hopefully in a nice spot somewhere.
It's a chart buster on the album of retirement account hits, including such notables as:
- Roth IRA
- Traditional IRA
- Self-directed 401(k)
What can a SEP-IRA do for me?
In short, you can save more money.
The big difference in a SEP-IRA and a normal IRA is that you can contribute WAY more to a SEP-IRA, offsetting taxes while saving money for retirement.
Annual contribution limits on a SEP-IRA are 25% of compensation or $57,000, whichever is lower.
That's almost TEN TIMES the traditional IRA contribution limit!
Imagine this: you contribute the maximum amount annually to your IRA for 40 years at today's limits.
You have a balance of $240,000, excluding all returns. Returns play an extremely significant role in generating returns. Great returns can produce a huge multiple of this amount.
Now let's say you earn $100,000 per year with your small business. You can contribute $25,000 per year. That's a million dollars, excluding returns. It's also a million dollars you DIDN'T have to pay tax on, compared to $240k tax free. The tax-savings alone is effectively a massive ROI.
The Ultimate Retirement Solution for Entrepreneurs
On paper, everything looks great for the SEP IRA. Huge contribution limits, tax savings, unlimited investment choices (unlike traditional employer-sponsored retirement plans), it's got it all!
But there's one rub.
The employer MUST contribute to all employees on an even percentage basis.
If the employer wants to contribute 25% of his or her compensation to the plan, that employer must contribute 25% of EVERYONE'S salary to the plan.
The employer takes a 25% hit across the board. It benefits everyone tremendously, and that employer will attract TOP talent from around the world, but it's expensive.
Solution: Only have one employee. AKA, a solopreneur.
This plan is PERFECT for a single-member LLC, sole proprietor, or any business structure with one person, or an owner and a spouse. The single employee gets the benefit without needing to contribute to anyone else. If the spouse works there as well, both can benefit subject to the same higher cap.
Worth noting, and without commenting on ethical standards, a contractor doesn't count as an employee per the IRS definition.
Want to set up a SEP IRA for your business? Drop us a line! We can help walk you through the setup and even help you set up your investment plan to maximize reward while minimizing risk.
The three different major IRA types and their contribution limits:
Taxed on the way in
Can withdraw contributions early with no penalty
Taxed on the way out
Penalties for early withdrawal (with some exceptions)
Taxed on the way out
Penalties for early withdrawal
Must be an equal portion of compensation for all employees
We are not tax professionals
Please note that Williamson Asset Management LLC or any of its affiliated companies are not tax professionals, and this should not be construed as tax advice. Please consult with a CPA or other tax professional before implementing any tax strategy.