self employed

Is a SEP IRA Right for Your Retirement Strategy?

Self-employment can be a fulfilling experience, but it can also create numerous challenges. You have to serve your customers and prospect for new business. You have to keep a careful eye on your cash flow and bottom line. You may have employees whom you need to manage.

With so many challenges on your plate, it might be difficult to think about retirement. After all, retirement could be years or decades away. It may not be on your radar at all. Perhaps you think your best retirement plan is to focus on expanding your business. Many business owners have that mindset.

However, retirement is too big a financial challenge to ignore. There’s no guarantee that you’ll be able to work as long as you want or that you’ll be able to sell your business for full value. It’s always helpful to have retirement assets, and you may find that a retirement plan helps you attract and retain good employees.

A 401(k) plan may not be right for your business because of its high costs and administrative burdens. However, you have an alternative. It’s the Simplified Employee Pension plan, also known as a SEP IRA. Below are a few tips on how the SEP IRA can help you and your employees prepare for retirement:

 

SEP IRA Basics

A SEP IRA is a qualified account created for small businesses and self-employed individuals. It’s taxed very similarly to a traditional IRA. You can make tax-deductible contributions, and growth in the account is tax-deferred. Your distributions are taxable, though, and you could face a 10 percent penalty if you take a withdrawal before age 59½.

Most SEP IRA custodians offer a wide range of investment options, so you and your employees can choose the allocation that’s right for your goals and risk tolerance. If you ever leave the business, you can roll your vested balance into a traditional IRA.

 

Contribution Limits

One of the benefits of a SEP IRA is that it has a much higher contribution limit than other types of IRAs. In 2018 you can contribute as much as $5,500 to a traditional or Roth IRA. That limit increases to $6,500 if you’re age 50 or older.1

With a SEP IRA, you can contribute up to 20 percent of your net income to a SEP IRA, with a maximum allowable contribution of $55,000.2 Keep in mind that these contributions are tax-deductible, so they help you save for the future and reduce your tax bill today.

 

Participants

If you have employees, you may want to carefully analyze whether a SEP makes sense for you. You have to offer SEP participation to any employee who is at least 21 years old, earned at least $600 in the past year and has worked for you in three of the last five years.3

Employees don’t make their own contributions to the SEP. Instead, you contribute on their behalf. You have to contribute the same percentage of their income as you contribute for yourself. For example, if you contribute 5 percent of your income to the SEP, you must also contribute 5 percent of each participating employee’s income.

Contributions to the SEP are discretionary, so you can pause them in a given year if cash flow is tight. If you don’t make contributions for employees, however, you also can’t make them for yourself.

Ready to develop your SEP IRA strategy? Let’s talk about it. Contact us at Peak Financial. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.

 

 

1https://www.rothira.com/2017-roth-ira-limits-announced

2https://www.kiplinger.com/article/retirement/T047-C000-S003-sep-ira-contribution-limits-for-2018.html

3http://money.cnn.com/retirement/guide/selfemployment_sep_ira.moneymag/index2.htm?iid=EL

 

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

17747 - 2018/6/19

Self-Employment and Retirement: Tips to Reach Your Goals

Self-employment is a dream come true for many people. You get to set your own schedule, make your own rules and earn income doing what you love. Self-employment can bring challenges and complications, but for many people the benefits far outweigh the costs.

However, self-employment can present difficulties when it comes to planning for retirement. Traditional employees are able to participate in their employer’s 401(k) plan or pension. They may even receive a matching retirement contribution from their employer. Self-employed individuals don’t have that option.

Many self-employed workers believe they can simply delay retirement as long as they want. If they love what they do, they may think they won’t have to retire at all. However, chances are good that you will have to stop working at some point. You could become physically unable to work, or you may simply decide that you want to pursue other activities.

The good news is you can plan ahead by taking action today. Below are a few tips to help you prepare for retirement:

 

Put your retirement contributions on autopilot.

One of the most complicated parts of self-employment is deciding how best to allocate your resources. You have normal bills and expenses like traditional employees, but you also have the option to invest money into your business. You can also put money away for retirement and future financial goals.

Far too many self-employed individuals choose to fund their business or current expenses over retirement. Given the option, they choose the priorities that feel most urgent. You can avoid this risk by putting your retirement savings on autopilot. Set up automatic transfers to your retirement accounts so you don’t have the option of using the money for other purposes. That could help you accumulate retirement assets quickly.

 

Contribute to a SEP IRA.

Qualified accounts such as 401(k) plans and individual retirement accounts (IRAs) are popular savings tools, primarily because of their unique tax treatment. Most of these plans are tax-deferred, which means you don’t pay taxes on your investment growth as long as the funds stay in the account. Some also offer current tax deductions.

As a self-employed individual, you may have another option—the SEP IRA. A SEP IRA operates much like a traditional IRA. You can deduct your contributions, and your funds grow tax-deferred. Your distributions are taxable, however, and you could face a penalty if you take a withdrawal before age 59½.

A key difference between the SEP IRA and traditional IRA is the amount you can contribute. In 2018 you can contribute 20 percent of your net income, up to $55,000, to a SEP IRA.1 This entire amount is tax-deductible. Keep in mind, though, that if you have employees, you are required to make contributions on their behalf, too.

 

Protect your most valuable asset—your income.

Finally, if you’re a self-employed worker, your most valuable asset may be your ability to generate income. Disability is a very real threat, and it’s a dangerous risk to your current standard of living and your retirement. The Council for Disability Awareness estimates that 1 in 4 adults will become disabled at some point in their lifetime.2

You can minimize this risk by purchasing disability insurance. These policies replace your income if you become physically unable to work. If you suffer an injury or illness that prevents you from working, the disability policy pays you some or all of your lost wages. You can use this money to maintain your lifestyle, pay medical bills and even fund your retirement.

Ready to plan your retirement strategy? Let’s talk about it. Contact us today at Peak Financial. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.

 

 

1https://www.kiplinger.com/article/retirement/T047-C000-S003-sep-ira-contribution-limits-for-2018.html

2http://disabilitycanhappen.org/overview/

 

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

17700 - 2018/5/30