Is a SEP-IRA right for your small business?

Is a SEP-IRA right for your small business?

3 years ago
Print Friendly

A SEP-IRA is a flexible, convenient, and affordable way for Colorado business owners to contribute to their own and to their employees’ retirement savings.

What is a SEP-IRA?

A Simplified Employee Pension Plan, commonly known as a SEP-IRA, is a retirement plan specifically designed for self-employed people and small business owners. When establishing a SEP-IRA plan for your Colorado business, you and any eligible employees establish your own separate SEP-IRAs; employer contributions are then made into each eligible employee’s SEP-IRA account.

Unique Advantages

Tax-deferred compounding. All of the money contributed to your SEP-IRA — as well as any dividends and/or capital gains on those holdings — grow tax deferred, which can build account values over time.

Tax-deductible contributions. You may take a federal income tax deduction equal to the amount of your employer contributions, up to a maximum of 25% of compensation paid during the year to employees (20% of net earnings after expenses if you’re self- employed). Plans may qualify for a $500 start-up cost tax credit.

This is a huge benefit to your employees that sets your business apart from other employers: “The Small Business Administration reported in 2012 that more than 9 million self- employed individuals lacked retirement plan coverage, and that only 19.5% of workers in firms with less than 100 employees participated in a retirement plan. One of the most common savings vehicles for self-employed individuals and small business owners is a Simplified Employee Pension, SEP-IRA.” – Putnam Group

“If you’re a small business owner, SEP-IRAs are appealing because they are easy and inexpensive to set up, and contributions are tax deductible. A SEP-IRA’s funding flexibility is also a draw. If you have a tough year financially, you can choose not to contribute to the plan. If you have a great year, you can fund the plan with a larger contribution than you’d originally intended.” – CNN Money

A win-win-win situation. Contributions to a SEP-IRA provide benefits to you, your business and your employees, as illustrated in the following example:

Salary

Contribution = 25%

Employer

100,000

25,000

Employee 1

60,000

15,000

Employee 2

40,000

10,000

Employee 3

30,000

7,500

Total Contribution

57,500

TAX SAVINGS (Based on 40% Corporate Tax Rate)

23,000

Easy, Cost-Effective Administration

Costs are low and maintenance is easy. SEP-IRAs do not require annual IRS filings and employers need not pay thousands of dollars in expensive administration fees associated with other types of retirement plans.

Fiduciary liability is minimal. All employees receive the same contribution rate, and investing decisions are the participant’s responsibility. As a result, the employer avoids the level of fiduciary responsibility that many other types of retirement plans require.Flexible Contributions with High Limits

Contribution limits are relatively high: Compared with other types of plans, maximum annual contribution limits to SEP-IRAs are high: $53,000 or 25% of each employee’s compensation for 2015 (20% of compensation if you are self-employed), whichever is less.

Contributions are discretionary: As the plan sponsor, you decide every year what amount to contribute. You can vary the contribution percentage from year to year, or you can skip contributions altogether. Keep in mind, however, that SEP-IRA contributions must be nondiscriminatory, which means you are generally required to contribute the same salary percentage to each eligible employee’s account.

Eligibility: SEP-IRAsmustgenerallyincludeanyemployeewhoisage21andover,has been employed by you for at least three of the past five years, and has annual earnings of at least $600 (for the 2015 tax year).

Expert Investment Management and Oversight

Each individual account will receive carefully tailored oversight by Vailshire Capital Management, LLC, a Registered Investment Advisor with the State of Colorado Division of Securities.

Client accounts are housed at Interactive Brokers, an unaffiliated and reputable brokerage house. Interactive Brokers has been named #1 online broker by Barron’s for the last four consecutive years. Interactive Brokers will provide monthly and year-end statements, as well as individual log-in credentials so each client may view their account at any time.

Costs are low and maintenance is easy. SEP-IRAs do not require annual IRS filings. The employer simply pays a $500 one-time set-up fee and each individual account is only charged a 1% annual management fee. The IRS currently offers a $500 tax credit to most small businesses.

Vailshire specializes in establishing SEP-IRAs for small businesses in Colorado. We can offer a no-cost consultation to see if a SEP-IRA is right for you. If you feel a SEP-IRA might be right for your small business, e-mail us today at info@vailshire.com

This information is for informational purposes only and does not constitute, and should not be construed as, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor. Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.