So, you’ve built consistent route work and have some loyal spring residential customers. Maybe even the Library or a few other large commercial projects have come back to you now the past couple years. You know you should think about saving for retirement, but you ask yourself, “how can I without it being a burden now?”
If you are a sole-proprietor or single owner Corporation or LLC, there’s a retirement account you may not have heard about that’s worth considering: the Simplified Employee Pension IRA or SEP-IRA for short. The key advantage of the SEP-IRA is not just it has high annual maximum contribution limits, up to 25% of net income or $53,000 (whichever is lesser) and may allow to you to reduce your taxable income by as much as 25%. The key advantage for small business owners with fluctuating or uncertain cash flows is when you contribute. It is not necessary to contribute to your SEP-IRA every month. Maybe you would feel more comfortable waiting for that large commercial check to come in the Fall? Or you would prefer wait and see what end of year brings? No problem. Contributions and Deductions are just due before your tax filing deadline. What about in lean years? You can forgo making contributions altogether. Remember, the high maximum contributions, mentioned earlier, means you can make it up later if you want.
What Is a SEP-IRA?
The SEP-IRA was created in 1978 to provide a tax-advantaged retirement plan for small businesses. Contributions to the SEP-IRA are made by a small business into an account for the benefit of an individual, typically the sole employee. SEP-IRA accounts are available to small businesses ranging from sole proprietorships, partnerships, LLCs, S-Corporations and C-Corporations.
Amounts contributed to a SEP-IRA are tax deductible, thus lowering your tax liability for the year. Further, like a traditional IRA or 401(k), contributions to a SEP-IRA are not taxed in the year they are made. Instead, taxes are deferred until withdrawals are made, allowing the money to compound tax-deferred for long periods of time.
A big advantage of SEP-IRAs over most other retirement plans are its ease of setup and maintenance. Costs to establish and maintain are minimal, making it perfect for solo business owners. Further, as a business owner, typically your greatest asset is your business. Using a SEP-IRA will allow you to diversify your assets. Within your plan you will have access to thousands of choices within the market to invest your retirement assets. Not only with this help you diversify but in most cases retirement assets can be protected from creditors even during bankruptcy. Lower taxable income, investing in your retirement, and diversification and protection of your assets the SEP-IRA may be just what you need to protect your future.
J. Michael Tuohey, CPA is a Partner at Bolmgren RetirePLAN, a registered investment advisor in Illinois, Arkansas, and Wisconsin. Contact Mike at (501) 545-3281 or firstname.lastname@example.org for more information about small business retirement plans.