RETIREMENT PLANNING
A SEP plan allows a small business to offer similar retirement packages to 401(k)s which larger companies may offer.
Employees oversee how their SEP IRA account is invested.
Small business owners can offer employees (and themselves) a tax-deferred retirement savings plan similar to the plans offered by larger corporations—but without incurring the high start-up and operating costs of a conventional retirement savings plan such as a 401(k).
A simplified employee pension (SEP) plan is similar to corporate retirement plans such as 401(k)s in that:
However, there are also some important differences. While 401(k) plans are funded with pre-tax compensation from employees (sometimes supplemented with a full or partial match by the employer), all contributions made to a SEP plan must come from the employer on behalf of the employees. Although a SEP plan is funded with after tax dollars, employer contributions are a deductible business expense.
An employer could make an annual contribution of up to the lesser of 25%1 of each employee’s compensation2 or $69,000 (whichever is less) for 2024 and $70,000 for 2025.
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Here are several other key facts to know about a SEP plan for small business owners:
Self-employed individuals can also open a SEP plan for their retirement savings.
RELATED ARTICLES
If you’re self-employed, you can still benefit from a tax-deferred retirement plan
If you’re self-employed, you can open a Simplified Employee Pension Plan (SEP) that may allow you to contribute thousands of dollars each year to a tax-deferred account.
Steps to start planning for retirement now
To start planning for the retirement you want or will be able to afford, you’ll need an idea of your current costs, what they’ll be in the future, and how much income to expect from your investments. From there you can adjust as needed.
Establishing a SEP plan for your business involves maintaining a plan document. The IRS provides a prototype document called the 5305-SEP, Simplified Employee Pension. That is a matter that you may choose to handle through your tax advisor or on your own. (For more details, see IRS article How do I establish a SEP?)
Once your business has completed the required IRS form, you and your employees will be able to open SEP IRA accounts with a qualified financial institution to receive the contributions and enable participants to invest their funds. While contributions come from the employer, each employee owns and controls their own SEP IRA account.
Thrivent Asset Management offers a SEP IRA account that enables you to choose from all-in-one investments or build your allocations according to your specific objectives. Whether your goal is accumulation or distribution, Thrivent Asset Management offers simple solutions to diversify investments based on your risk tolerance. If you are offering or part of a SEP plan, consider opening a SEP IRA through Thrivent Asset Management to save for your retirement.
1 Self-employed owners who file Schedule C are limited to 20% of net earned income.
2 For Schedule C filers, it would be net earned income; for Schedule C or Sub S Corporation filers, it would be W-2 income.
The information provided is not intended as a source for tax, legal or accounting advice. Please consult with a legal and/or tax professional for specific information regarding your individual situation.