An option for retirement planning that you can offer to your employees is a simplified employee pension or SEP IRA. This type of plan allows you to make contributions on a discretionary basis, and those contributions will be tax deductible for your business. You will also get a tax credit to cover the costs of starting a SEP or 401k plan.
How Does the IRS Limit SEP Participation?
One of the things to consider is whether or not you will be able to start this type of IRA plan for your employees. Only certain types of businesses are eligible and those types are sole proprietors, partnerships, and corporations. Additionally, all of your employees may not be eligible. Only individuals who earn $305,000 or less each year can participate in the plan.
How Does a SEP Plan Differ From a 401k Plan?
There are several differences between these two types of accounts. While contribution limits become similar when the accounts reach balances of $200,000, 401k accounts with lower balances allow larger annual contributions. Catch-up contributions and borrowing are also options available only with a 401k plan.
Can You Start a SEP Plan as a Self-Employed Individual?
In addition to helping small business owners provide retirement benefits to their employees, the SEP IRA helps self-employed individuals save for their retirement. As a self-employed individual, you’ll enjoy all of the tax credits as any small business owner in launching a SEP plan. Additionally, your contributions will be tax-free until you withdraw the funds at retirement age. At that time, the withdrawals will be taxed as ordinary income.
You can learn more about your options for starting an employer-based retirement plan by consulting a financial planner. They can help you outline the options for adding a retirement plan to the benefits package you offer your employees.