SEP IRA - The Basics

Over the past few years, many taxpayers have made the switch from employee to self-employed. Although much can be gained from that change, there are also a few things that can be lost, including being covered by an employer's retirement plan.

 

The SEP IRA is a retirement plan designed to benefit self-employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify.

 

SEP IRA contribution limits

 

In 2010 a SEP IRA has a contribution limit of $49,000. Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes.

 

A SEP IRA has broad appeal due to its high annual contribution limits, completely discretionary and flexible annual contributions and minimal administration. SEP IRA plans can be established by a one person business or by a business owner with employees.

 

· Most frequently, a SEP IRA is established by a business owner without employees

 

SEP IRA for a self-employed business owner without employees

 

When a SEP IRA is established for a unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income (or net adjusted business profits).

 

Note: For self-employed individuals, net adjusted self employment income is calculated by taking gross self employment income and then subtracting 1/2 of the self employment tax. An annual SEP IRA contribution can be made between 0% to 20% of that figure up to the annual SEP IRA contribution limit.

 

SEP contributions are flexible and the percentage of contribution can be changed at any time and may be skipped in a bad year. SEP IRA contributions are generally 100% tax deductible from personal income.

 

SEP IRA for a self-employed business owner without employees

 

If a self-employed person has employees, they should be aware that opening a SEP could subject them to requirements to fund the plan for their employers. The rules are extensive, and business owners with employees should consult an advisor before opening a SEP IRA.

 

When is the SEP IRA setup and contribution deadline?

 

Generally a SEP must be established and funded by your tax filing deadline. Filing extensions extends the period for establishing and funding the SEP plan. For a sole proprietor April 15th would be the deadline to establish and fund a SEP for the prior tax year. If an extension was filed a sole proprietor can establish and fund a SEP IRA by October 15th.

 

Please contact us to discuss whether a SEP IRA is the right choice for you and your business.