Cents and Sensibility
Guy Steele
If you're self-employed, and you've already established a SEP-IRA retirement account, you've still got until April 15 to fully fund your plan for the 2002 tax year. If you haven't set up a SEP IRA, you might want to think about opening one -- because it can help people like you build significant resources for retirement. SEP-IRA offers tax
benefits, high limits
for contributionsIf you don't have a SEP-IRA yet, you can still establish and fund one for 2002, as long as you do so by your tax-filing deadline. This will likely be April 15, but your business could have a different deadline.
A SEP-IRA offers you some key advantages. First, of course, are the tax benefits. Your contributions are tax deductible and your earnings grow tax deferred, which means your earnings can grow much faster than it would if placed in an account on which you paid taxes every year.
Furthermore, the SEP-IRA's relatively high contribution limits allow you to put away sizable sums every year. For 2003, you can put in the lesser of $40,000 or 25 percent of your compensation (eligible compensation is capped at $200,000).
Obviously, a SEP-IRA can be a great vehicle for building your individual retirement savings. But if you own a small business, you may find that a SEP-IRA is also a good tool for attracting and retaining good employees.
IRS regulations require you to include all eligible employees who are at least 21 and have been with your company for three out of the immediately preceding five years. But once the plan is set up, you have a great deal of flexibility in making contributions to your employees accounts. Consequently, you can change your annual contributions, or cut them altogether, according to the performance of your business. Keep in mind, though, that the percentage of compensation contributed to a SEP-IRA must be the same for you and your employees. So, for example, if you put in 25 percent of your compensation to your SEP-IRA, you must also contribute 25 percent of all eligible employees compensation to their plans.
When you make company contributions, you may be able to deduct them as a business expense.
Your employees may be attracted to the SEP-IRA for some of the same reasons you are -- tax-deductible contributions, tax deferred growth, and a wide range of investment options. You can set up a SEP-IRA for your business with a minimum of paperwork. And you won't have to file a Form 5500, either.
Given all the benefits of a SEP-IRA -- tax advantages, high contribution limits, ease of administration -- is it the right plan for you? It all depends on your individual situation. If you have employees and you want to offer a retirement plan as a benefit, you'll want to give strong consideration to a SEP-IRA. If you have no employees, you have other good options, one of which is an "owner-only 401(k)." An owner-only 401(k) offers many of the same benefits of a SEP-IRA, along with a loan feature.
Your tax adviser can help you determine which type of retirement plan is right for you.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com