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Why SEP IRA is the best option for small businesses

Small businesses can enjoy several benefits in choosing Simplified Employee Pension IRA or SEP IRA as their retirement plan.



Do you as a small business owner find the process of choosing a retirement plan expensive and confusing? A Simplified Employee Pension IRA or SEP IRA might be the perfect option for you.

A wide-array of small businesses, ranging from partnerships, LLCs, S-Corporations, C-Corporations to sole proprietorships can benefit from the powerful features of SEP IRA accounts. These accounts were created to provide a tax-advantaged retirement plan for small businesses.

A SEP IRA can simply be set up by executing a written agreement, or setting up the SEP plan with a qualified financial institution (such as a mutual fund company, a bank, a brokerage firm or through a financial advisor), or by opening a SEP IRA for each eligible employee.

Let’s take a look at seven ways in which small businesses can benefit by choosing a SEP IRA:

  1. A major advantage of an SEP IRA account is its high yearly maximum contribution limit. Hence, you may contribute more to a SEP IRA as compared to traditional IRA or Roth IRAs as long as you make more than $22,000 approximately.

  2. As with a traditional IRA or 401(k), contributions to a SEP IRA account are not taxed in the year they are made. Instead, until the withdrawals are made, the taxes are deferred. This allows the money to compound tax-deferred for long periods of time.

  3. Employers can reduce the tax bite on the contributions they make to the SEP IRA account of their employees as these contributions are tax-deductible for the employer.

  4. With an SEP IRA, an employer is not required to make contributions each year. Also, the amount of contribution that you can make as a percentage of an income can vary from year to year.

    small business

    SEP IRA provides various benefits to small businesses. (Source)

  5. In case of a 401(k) plan, it is mandatory to fill out an annual form 5500. But this is not the case with an SEP IRA. There is no requirement to fill out excess tax forms.

  6. Every participant has immediate and complete ownership of the money contributed by you to his or her SEP IRA accounts. This means the employer is not responsible for the investments within the employees’ accounts. Also, the employer does not have to set up a schedule for vesting or to track service requirements. Each employee is responsible for choosing his or her investments inside this account.

  7. With SEP IRA, employers can take advantage of the flexible funding feature. This means the employers can take the decision every year regarding the amount to be contributed to this account. The amount can vary and the employers can even skip contributing any amount altogether.

Apart from all the features listed above, small business owners can also benefit from the fact that along with contributing for an SEP IRA, they can also contribute to a Roth or a traditional IRA. Also, SEP IRAs are easy to set up, have no initial setup or annual maintenance fees, come with low administrative costs, and are easily available through most online investment firms.

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, get in touch with Rick.