In my opinion, a Simplified Employee Pension (SEP) plan is among the very best retirement accounts for small businesses with one to three employees, where the owner is the “rainmaker” and has lower income employees.
Sales can vary greatly from year to year for a small business owner or sole proprietor. But a SEP gives a business owner the ability to change contribution levels to meet business conditions.
So what is a SEP? According to the IRS, a SEP gives business owners a simplified way to contribute to their employees’ retirement or their own retirement savings. The IRS says SEP-IRA accounts follow the same investment, distribution and rollover rules as traditional IRAs.
SEPs are very easy to set up. And they’re easy to administer, much more so than a 401(k). You’ll fill out some basic paperwork to set up a SEP with a broker or a bank, and you’re up and running. The IRS does not require any annual reporting, either. SEPs also have higher contribution limits than many other types of plans. For example, the 2015 SEP-IRA contribution limit is $53,000; whereas, the IRA contribution limit is $5,500, or $6,500 if you’re over 50 years of age.
SEP contributions are based on a percentage of someone’s income. If a business owner has employees, then the owner has to contribute a percent of the employee’s income to the SEP. The owner also has to do that for every other eligible employee. There are no employee contributions. So this limits what an employee can put away for themselves.
As good as SEPs are, I still meet business owners who delay creating a SEP or fail to fund it adequately. The reasons include: “I’m investing in my business, so I can’t invest for my retirement,” or “My business is my retirement plan,” or “I have more control over investments and return on revenue in my business than I do with a SEP.” Thinking like this tells me that people really haven’t investigated SEPs or their retirement planning strategy may need a second look.
What’s been your experience with SEPs?
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