If you want a retirement plan for your small company or self-employed business — but you don’t want to be buried in paperwork — consider a simplified employee pension plan or SEP.
Among the appealing advantages:
- SEPs are set up by simply filling out a brief form.
- Annual reports aren’t required to be filed with the IRS, although you must provide a copy of the SEP form to each covered employee. (Most retirement plans require detailed reports to be filed with the IRS and the Department of Labor.)
- Contributions can go from zero to the maximum each year, so if your company has a bad year you can skip the contribution.
- SEPs allow for “look-back” contributions. As an example, you can make a SEP contribution, up until the date you file your tax return (including extensions), and deduct that contribution on that tax return.
- Employees make their own investment decisions. All SEP contributions are fully vested and portable. In fact, SEPs are sometimes referred to as SEP-IRAs. The maximum contributions are 25% of compensation for employees, or 20% of self-employment income for sole proprietors, partners and LLC members. The absolute maximum amount that can be contributed to an account and deducted is $55,000 for 2018 (up from $54,000 in 2017).
All in all, if you are a small corporation or self-employed, the ease of a SEP may simplify your life and help fund your retirement. Consult with your tax advisor for more information.
Despite the Advantages, there Are a Few Downsides:
All of the SEP funding comes from you. And you may have to contribute on behalf of employees that you’d like to exclude.
If you have a large, relatively high-paid workforce, sponsoring a SEP can be expensive.
There is 100% vesting right away so you have little or no control over what each employee does with the money. If a staff member wants to take out their funds prematurely and pay the taxes and penalties right away, you can’t prevent it.
