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Financial Planning

For Fortune 500 Business Owners: Is a SEP-IRA Right for Your Business?

 

If you are an Fortune 500 employee who also owns a business, you may be aware that running a modest business is a time-consuming endeavor for many entrepreneurs.

Choosing a retirement plan for your business while employed by Fortune 500 can fall victim to day-to-day demands. The idea of establishing a plan may raise concerns about reporting and administration complexities.

If this sounds familiar, you as an Fortune 500 employee and independent business owner may want to consider whether a Simplified Employee Pension (SEP) is appropriate for you.

Sole proprietors, partnerships, and corporations, including S corporations, can establish a SEP.

Fortune 500 business owners may benefit from understanding that the SEP's advantages begin with the ability to modify employer contributions from 0% to a maximum of 25% of compensation, with a maximum dollar contribution of $55,000 in 2018.

Employees Vested

The percentage you contribute must be the same for all eligible Fortune 500 employees who are business proprietors. Employees who have worked for you for at least three of the past five years and earned at least $600 (in 2018) are eligible. All contributions are immediately 100% vested to employees.

IRS filings are not required, making administration uncomplicated and inexpensive. Fortune 500 employees are only required to complete form 5305 SEP for their own records. This form should be distributed to all eligible employees as soon as they become eligible to participate.

In contrast to other plans, a SEP can be established until the due date (including extensions) of your business' tax filing (typically April 15) for making contributions for the prior year.

A Menu of Options

Each eligible employee will be required to establish his or her own SEP-IRA account and self-direct the investments within the account, alleviating you of the responsibility of determining the plan's investment options. Access to these funds is governed by the same regulations that regulate traditional IRAs.

Under the SECURE Act, if you are employed by Fortune 500 and reach the age of 72, you must begin drawing required minimum distributions from your SEP-IRA and Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income and may be subject to a 10% federal income tax penalty if made before age 5912.1

You cannot take out a loan against your SEP assets, unlike the self-employed 401(k), which is only available to business proprietors without employees. According to the SECURE Act, Fortune 500 employees must begin drawing minimum distributions from their 401(k) or other defined contribution plan in the year they turn 72. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income and may be subject to a 10% federal income tax penalty if taken before age 5912.1

The SEP lives up to its moniker and is an attractive option for business owners seeking to maximize contributions while minimizing administrative burdens.

1. There are exceptions to the 10% penalty on IRA withdrawals, including death and disability.

Added Fact:

A new piece of information that Fortune 500 business owners may find relevant is that SEP-IRAs allow for additional catch-up contributions for those aged 50 and older. According to the IRS, in 2023, individuals aged 50 and above can make catch-up contributions of up to $6,500 on top of the regular contribution limit of $58,000 or 25% of compensation, whichever is less. This catch-up provision enables business owners who are closer to retirement age to accelerate their retirement savings and potentially make up for any previous years with lower contributions. It offers an opportunity for Fortune 500 business owners to bolster their retirement funds as they approach their golden years. (Source: IRS.gov, Retirement Topics - Catch-Up Contributions, July 2023)

Added Analogy:

Imagine your business as a grand orchestra, with you as the conductor, guiding the harmonious flow of finances and future security. Just as a conductor carefully selects the instruments that best complement the symphony, Fortune 500 business owners must choose the right retirement plan for their business. Think of the SEP-IRA as the perfect instrument, offering a balance between contribution flexibility and administrative simplicity. Like the conductor's baton, the SEP-IRA allows you to set the rhythm of your retirement savings, conducting contributions from 0% to a maximum of 25% of compensation. Its seamless administration, akin to the smooth coordination of a well-rehearsed orchestra, eliminates the need for complex IRS filings. By embracing the SEP-IRA, you orchestrate a retirement plan that harmonizes maximum contributions while minimizing administrative burdens, allowing you to create a financial symphony that resonates long into your retirement years.

Securities offered through FSC Securities Corporation, member FINRA/SIPC and investment advisory services offered through The Retirement Group, LLC, a registered investment advisor not affiliated with FSC Securities Corporation. Although FSC is a signatory to the Broker Protocol, TRG is not. The removal of PII from FSC under the Broker Protocol is a violation of the Privacy Policy. Representatives are securities registered and are able to service clients in the following states: ALABAMA, ARIZONA, ARKANSAS, CALIFORNIA, COLORADO, FLORIDA, GEORGIA, ILLINOIS, INDIANA, KANSAS, MASSACHUSETTS, MICHIGAN, MISSISSIPPI, MISSOURI, NEVADA, NEW HAMPSHIRE, NEW JERSEY, NEW YORK, NORTH CAROLINA, OHIO, OKLAHOMA, OREGON, PENNSYLVANIA, SOUTH CAROLINA, TEXAS, TENNESSEE, WASHINGTON, WISCONSIN.

TheRetireKit

 

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