When You Want to Contribute More
A Simplified Employee Pension (SEP) plan is one such way to both reduce taxes and build your retirement portfolio. Depending on your business, you could build a sizable nest egg.
In tax year 2017, employer contributions are based on the first $270,000 of compensation. Every eligible employee must receive the same percentage of compensation up to certain limits. Those limits are the smaller of $54,000 or 25% of compensation.
You don’t have to contribute to the plan every year. But when you do, everyone who qualifies must receive contributions, which immediately vest to employees.
If you have a few employees, a SEP-IRA may work for your business. However, you may find most employees are eligible. Anyone who is at least age 21 and was an employee of your business in three of the last five years is eligible to participate in the SEP plan.
While business owners with employees must consider the expense of contributing to those who qualify for a SEP, self-employed individuals have no such challenges. Contribution limits are the same as for businesses with employees. However, the self-employed have a separate calculation to make.
Calculate your compensation as net earnings from self-employment less one-half of your self-employment tax, less contributions made to the SEP-IRA.
Whether you have employees or not, there is a 10% tax penalty and ordinary income tax levied on most withdrawals taken before age 59½. Required minimum distribution rules also apply. Check out IRS Publication 4333, SEP Retirement Plans for Small Businesses, or consult a tax professional to learn more.
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