A Simplified Employee Pension (SEP) is the high income, small business owner’s answer to a tax-advantaged retirement plan. Now may be the perfect time for you to put one in place, if you haven’t already. An SEP is easy to set up and has high contribution limits. Another great reason to take advantage is that you still have time to establish an SEP for 2017 — and the contributions you make now can be deducted on your 2017 income tax return.
2018 deadlines for 2017
You can create your SEP up until the due date (including extensions) of your income tax return for the tax year for which the SEP first applies. For instance, you can establish a 2017 SEP in 2018, as long as you do it before your 2017 return filing deadline. You also have until the same deadline to make contributions for 2017 and still claim a hefty deduction on your 2017 return.
With most other types of retirement plans, in order to make any 2017 contributions, you would have already had to have established your plan by December 31, 2017. (Some exceptions exist, of course).
High contribution limits
SEP contributions are discretionary — you determine how much money to impart each year. If your business has additional employees (besides just you), bear in mind two things: 1) Contributions have to be granted to all eligible employees using the same percentage of compensation as for yourself, and 2) employee accounts are immediately 100% vested. Establish individual SEP-IRAs for each qualified employee, and contributions will go directly into that.
The maximum contribution one can put toward an SEP-IRA for 2017 is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) up to $270,000, subject to a contribution cap of $54,000. (For 2018 the limits are $275,000 and $55,000, respectively.)
Simple to set up
To set up an SEP, you will complete and sign Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). This simple form is not filed with the IRS but must be kept with the company’s permanent tax records. Each employee who is covered by the SEP needs a copy of Form 5305-SEP, along with a disclosure statement.
SEPs have additional rules and limits, but typically it’s less burdensome to adjust to them than with other retirement plans. To learn more about SEPs, contact us or call 949-860-9902. We would love to help you reduce your tax bill for 2017 and beyond.