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Self Employment PensionsPosted by solo 401k on: 2006-12-18 15:45:57 in category:
SEP IRA [ Print | Permalink / 0 Comment(s) ] Tony Robinson As a member of the rank and file of self-employed, I can tell you that it is one of the most wonderful ways to make a living. It is also one of the best ways to never plan for retirement, and turn around at age 65, with nothing but Social Security to fund your retirement years. But, it doesn't have to be that way. Thanks to the creation and passage of the Self Employment Pension options, more Americans have the opportunity to save money, tax free, in order to fund their retirement years. An SEP, or self-employed pension plan, is a simple way for the self-employed individual to setup a written plan for making contributions toward their own retirement. Yes, any other eligible employees must be covered also, but the plan is by far the simplest and least complex option available. What are the basic guidelines for establishing a self-employed pension plan? You must execute a formal written agreement to provide benefits for all eligible employees and yourself. You must provide written information to all employees that will explain the SEP, and there must be an SEP-IRA setup for each employee. It's not even necessary to file the forms with the IRS, if you use what's known as a 5305-SEP; you don't have to obtain IRS approval or a determination letter. You can set the plan up with a bank, insurance companies or other qualified financial institution. You then send the SEP contributions to the financial institution where the SEP is maintained. Is there any limit to the contribution amount or time of the contribution? Yes, and yes. You must follow certain guidelines when establishing contribution levels so that your individual contribution does not exceed a reasonable comparative level for the employees. The contributions must follow a written allocation formula, and must not discriminate in favor of any one sector of employees, especially the highly compensated employees. Contributions do not have to be made each year, but they must follow the prescribed guidelines above when they are made. The limits set on the contributions you can make cannot exceed 25% of the employee's compensation or $41,000. The compensation does not include the SEP contribution. There are other restrictions that can be placed on the contributions, but they are really too detailed to cover in an article of this nature. Let me just say that if you are considering a self-employed pension plan, seek the advice of a financial advisor, and follow the requirements exactly, as you and the employee may be penalized for contributions that exceed the income deferment limits. If you exceed the contribution limits for one particular year, you can carry those contributions over with what is known as excess carryover contributions. The only concern you may have, is that once carried over, they will reduce the upcoming year's contributions, too. Now, there's also the option to "carry back" contributions, but the carry back is only an option for the preceding year. You cannot go back and pick up ten years worth of missed opportunities, otherwise one would never run out of contribution options, and there would tend to be a massive abuse of the retirement system. Many business owners simply do not understand the retirement process, and for many years it was a very expensive proposition to fund retirement accounts, such as 401(k) s; the complexity was difficult, the expense large, and the small business owner simply did not have the available resources to offer a program like this. Today, the process has been extremely simplified, and the cost has been reduced to almost nothing. You no longer even need the permission of the IRS, with some forms. The SEP retirement opportunities available to self employed persons today are some of the most opportunistic ever available. It is an opportunity that every business person should take full advantage and make the most of, no matter how impossible that might seem. There is always room to save a little, and as we advance toward longer life spans, better medicine, and a Social Security program that will under current limits, be grossly under-funded when retirement is reached, we should take every opportunity possible to save for our retirement. About the author: Tony Robinson is a Webmaster and International Author. Visit http://www.tax-portal.com/ for his tax tips. The following help center is designed to provide you with a high level of SEP IRA service.
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