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 Plan (SEP) 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 the pre-tax compensation from employees (sometimes supplemented with a full or partial match by the employer), all contributions made to a SEP must come from the employer on behalf of the employees.
An employer could make an annual contribution of up to the lesser of 25%1 of each employee’s compensation2 or $57,000 for 2020 and $58,000 for 2021.
Here are several other key facts to know about a SEP for small business owners:
Establishing a SEP 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 would 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 Mutual Funds offers a SEP IRA that enables you to choose from all-in-one investments or build your own allocations according to your specific objectives. Whether your goal is accumulation or distribution, Thrivent Mutual Funds 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 Mutual Funds 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 filer, it would be net earned income; for Schedule C or Sub S Corporation filer, 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.