Many employers do not understand how easy it can be to start a small business retirement account for many of their highly valued employees. Not only does this provide for your employee's a long-term retirement nest egg, but equally a wonderful benefit to the employer!
First, what is a small business retirement account? There are many, but the one we are going to focus on is the SEP-IRA. What is a SEP-IRA? A SEP-IRA is defined as a Simplified Employee Pension, which is a written plan that allows employers to make a retirement contribution to an individual retirement plan. This is set-up for each eligible plan participant. These contributions maybe deducted from the business's income and excluded from the employee's income. In addition, eligible employees can make Traditional IRA contribution to their existing SEP-IRA accounts. SEP-IRAs can have a higher annual contribution than a Traditonal IRAs. SEP-IRAs are subject to most of the prodedures and federal income tax rule that apply to the Traditional IRA.
SEP-IRAs may not only provide you with a tax-advantaged way to save for you own retirement, but also help you attract and retain highly qualified employees by providing for their retirement needs.
Next question, who can establish a SEP-IRA? You may establish a SEP-IRA if your're an employer or if you have a self-employment income. An employer could qualify as Limited Liability Company, Limited Liability Partnership, C Corporation, S Corporation, Sole Owner or Partnership. It's not necessary to have all employees to set-up a SEP-IRA account only include all eligible employees as participants in the SEP-IRA.
What are the many advantages to set-up a SEP-IRA? Not only is it easy and affordable to set up a SEP-IRA, the advantages and benefits are numerous! For instance, employers do not have to make contributions to the SEP-IRA every year! If you're business is slow one year, the employer may skip that year to make contributions into their employee's account, but still have the flexibility to where the employees still can contribute. The employer has the flexibility to establish a SEP-IRA and contribute to it after year end. That is, you have until the due date of your business's federal income tax return to set up the SEP-IRA and make the contributions.
How easy is it to establish a SEP-IRA? You may set up a SEP-IRA by signing an IRA Form 5305-SEP and a adopting a prepackaged prototype SEP from a financial institution or another company. The smoothest process is by talking to a financial advisor, they will guide you to all the proper and legal paperwork requirements and explain in detail to the procedures that are needed to establish the SEP-IRA retirement program.
Another wonderful advantage to setting up a SEP-IRA is that the IRS reporting requirements are minimal. You do not even have to file the form with the IRS, if you use the Form 5305-SEP. With SEP-IRAs you have a higher contribution limits and they maybe deductible. Fact is, if you make the contributions to your SEP-IRA, this does not exclude you or your employees from establishing or contributing to a personal Traditional IRA. An employer can continue to make contributions to an employee's SEP-IRA even after 70 ½ years old. The pre-taxed dollars that you contribute grows tax-deferred and in certain cases SEPs may offer more protection from creditors that Non-SEP-IRAs in the EVENT of a bankruptcy!
Now, this sounds like it's too good to be true. So what are the disadvantages to do SEP-IRAs? You must include ALL ELIGIBLE EMPLOYEES in a the SEP-IRA. That does not mean ALL EMPLOYEES! They would have to first qualify in order for the employer to make their matching contributions. SEPs may offer less protection from creditors than Non-SEPs OUTSIDE of bankruptcy.
The most important question now is how do I establish a SEP-IRA for your small business? The employer must establish the SEP-IRA by the due date (including tax-extensions) of your federal income tax return, make annual disclosures to your employees, each eligible employee must set up an IRA with a qualified sponsor, determine whether you can use IRS Form 5305-SEP and provide a copy of Form 5305-SEP and generaly a statement to your covered employees.
Finally what are the tax implications for SEP-IRAs? The tax-advantages of SEP-IRAs is for the income tax contributions to a SEP-IRA can be deducted from personal and business income. SEP-IRAs accounts accrue tax-deferred, income taxes is due in the year of the distributions, usually when the employee retires and now need the retirement assets. A 10 percent premature distribution tax maybe assessed on distribution made prior to age 59 ½ years old. Your business may also qualify for the small employer pension plan start-up tax credit. You and your empoyees may qualify for the tax saver's credit for IRAs, retirement plans and SEP-IRA proceeds are included in determining if estate tax is owed when you die.
If you do feel that a SEP-IRA would be suitable form of a retirement program, it is best to consult a financial advisor. They will be able to provide you all legal information and requirements needed to establish a SEP-IRA for the benefit of your company and your employees!
Our specialists will conduct a custom search to find local planners and advisors who meet your specific requirements.
"There are lots of choices out there when it comes to financial advice, and it was honestly overwhelming - but this site helped me narrow my search down to only the most knowledgeable and affordable advisors around!"
Laura D, Boston MA