As a business owner, would you like to save more for retirement? As an investor, would you like to build your self-directed IRA account balance faster? If you have business income, you may want to consider funding a Simplified Employee Pension (SEP) plan through your self-directed IRA.
A SEP plan is a business-sponsored retirement plan, through which contributions are made to the business owner’s IRA. With a SEP plan, you could contribute up to 25% of your compensation or $55,000 for 2018, whichever amount is less. With contribution limits this large, a SEP plan can be an effective way to build your self-directed IRA account balance and invest in alternative assets.
In addition to the large contribution limit, SEP plans provide some valuable benefits:
- You have until your business’s tax return deadline, plus extensions, to establish and fund a SEP plan. For example, if you would like to make a SEP contribution for 2018 for your corporation or sole proprietorship, you may establish a SEP plan as late as October 15, 2019, with a tax-filing extension.
- SEP plan contributions are discretionary. You are not required to contribute to the SEP plan every year. When you do choose to contribute, the amount may vary from year to year.
- Your SEP plan contributions are tax deductible.
- Certain small business owners may claim a tax credit for plan start-up costs.
- You can still contribute to your Traditional or Roth IRA in the same year you make a SEP contribution ($5,500, or $6,500 if you’re age 50 or older, for 2018)
The option to contribute and how much to contribute each year gives business owners great flexibility, making SEP plans particularly well-suited for start-up companies or other businesses with significant fluctuations in profits.
Any type of business entity can maintain a SEP plan, including sole proprietors, partnerships, S-Corporations and C-Corporations, not-for profit organizations, and state and local governmental entities. SEP plans are easy to administer and maintain, and the plan document can be completed in a matter of minutes.
If you are self-employed, calculating your maximum SEP contribution and deduction is complex and many self-employed individuals seek professional tax advice to calculate their SEP plan contributions. You can find more information and a worksheet to calculate contributions in the IRS Publication 560, Retirement Plans for Small Businesses.
If your business has employees and you choose to make a SEP plan contribution for the year, you must make contributions for all employees who meet the eligibility requirements you choose for your plan. Possible eligibility requirements include having to reach a certain age (up to 21) and having worked for you in at least three of the last five years. Employee contributions are typically allocated on a pro rata basis (i.e., the amount contributed to each employee is based on the ratio of the employee’s compensation to the total compensation of all eligible employees). You must notify your employees when you establish a SEP plan and again within 30 days after making a SEP contribution.
It’s not too late to fund a SEP plan for 2018. Talk to your financial advisor or tax professional to make sure you understand the contribution potential based on your business income. You may also contact us at 866-928-9394 or Service@StrataTrust.com with questions about funding a self-directed IRA through a SEP plan.