Retirement and Tax Savings with a SEP IRA

Entrepreneurs and small business owners are constantly on the hunt for ways to reduce their tax bills. I know because my tax clients ask about it regularly. Some tax clients also ask me about saving for retirement. Super good news – they can do both!

When you work for someone else, your employer may set up a retirement plan where you can contribute and reduce your taxable income. When you work for yourself, you can set up a retirement plan for yourself (and your employees, if you have any). Retirement plan types vary, and there are quite a few options. If you want to explore them all, knock yourself out at this IRS website – .

Many entrepreneurs and small business owners choose a retirement plan called a “Simplified Employee Pension Individual Retirement Arrangement,” commonly called a SEP IRA. Here are three reasons why:

Easy and Flexible

A SEP IRA is easy to set-up with your bank, your investment advisor or a mutual fund. Just get it done by the end of the calendar year and fund the account by the tax return due date, including extensions. Annual contributions amounts are flexible, which is good if your business cash flow varies from year-to-year.

Generous Contribution Limits

A SEP IRA allows you an annual contribution of up to 25 percent of net business profits, after netting out the deductible half of self-employment taxes. That calculation is a little tricky so you’ll need some help to get it right. There is an annual dollar limit, too. For 2019, it’s up to $56,000. Contributions must be made for eligible employees.

No Costs

A SEP IRA has no start-up or operating costs that can be required for a conventional retirement plan. However, any investments selected to fund the account may have a management or investment advisory fee. It’s important to get a clear understanding of any fees or charges that will defray your retirement funds.

Other costs need to be considered when deciding if a SEP IRA if for you, like taxes and early withdrawal penalties. Distributions from a SEP IRA works just like a traditional IRA – any funds taken out before age 59½ are subject to a 10% early withdrawal penalty. That’s on top of the federal and state income tax.

Entrepreneurs and small business owners on the hunt for ways to reduce their tax bills can save on taxes and for retirement by setting up and funding a SEP IRA. Saving for today and tomorrow at the same time could be the best news that you get all year.