Seems like this should be an easy question to answer, but there are so many options and so many objectives that figuring out the best retirement plan for your business takes a little work!
In our first post of our “Keeping It Short & Simple” series, we will provide practical information, based on years of experience working with business owners, to help guide you in your quest for the perfect retirement plan.
Let’s get started with one of the simplest retirement plans, aptly called a SEP (Simplified Employee Pension).
WHO uses these Plans?
Today, these are typically utilized by businesses who do not have employees.
WHY? They allow the business owner to maximize their savings, up to $66,000 for 2023, but do not provide flexible staff contributions.
- ? Easy to Set Up – usually the business owner’s accountant assists with this
- ? Minimal Administrative Fees
- ? Can contribute 25% of compensation on a tax-deductible basis, up to $66,000
- ? Costly when employees are required to receive a benefit.
SEPs can be drafted so that employees do not have to be covered until they have worked in at least 3 calendar years. But be careful, oftentimes Form 5305-SEP is drafted to allow for earlier employee participation.
What happens if I have a SEP and hire an employee? You will likely want to switch to a different retirement plan before your employee is eligible to participate. Otherwise, you will typically need to contribute equally to your employees.
EXAMPLE: If you want to maximize your SEP contribution by contributing 25% of your compensation, then you will need to contribute at the same rate for your employees (ie. 25% of each employees’ compensation.)