Simple Ira Plans For Small Businesses

Simple Ira Plans For Small Businesses – Are you self-employed or have a small business? And if so, do you want to lower your taxes and save for retirement? Have you thought about SEP IRA vs. SIMPLE IRA? In this article, we share two great ways to do this and the difference between a SEP and a SIMPLE IRA. Firstly through a SEP IRA and secondly through a SIMPLE IRA. At the end we will show you a comparison between SEP IRA and SIMPLE IRA to help you decide which one is best for you.

A SEP is an Individual Retirement Account (IRA) that a self-employed or self-employed person can set up. With a SEP IRA, only the employer can contribute to the account. If you’re self-employed or own a small business, you can set up a SEP IRA with virtually any financial institution. Examples include Vanguard, Fidelity, TD Ameritrade, Schwab, E-Trade. SEP stands for Simplified Employee Pensions. Here are five great features of a SEP IRA.

Simple Ira Plans For Small Businesses

1) It is tax deductible. This means that if you put $10,000 into a SEP IRA, you can deduct $10,000 from your taxable income on your tax return, resulting in a lower tax bill.

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2) Choice of investment. That’s really the beauty of a SEP IRA compared to a 401(k). A 401(k) typically requires you to choose from 10 to 15 funds that your employer has selected for you. Once set up, a SEP IRA allows you to invest in virtually any ETF or mutual fund that is publicly available to retail investors. So you can even buy individual stocks like Amazon or Tesla if you want.

We’re not suggesting that you use your SEP IRA to buy individual stocks, but your investment options are much broader with a SEP. By the way, if you want tips on picking individual stocks, be sure to watch our video on four smart stock picking steps.

3) A SEP IRA is tax-advantaged. That means you now don’t have to pay taxes on the dividends your investments earn each month or quarter. Also, let’s say you bought GameStop for $10 per share and sold it for $200 per share. You don’t have to pay capital gains taxes on the profit you just made because it’s in a tax benefit account, you only have to pay taxes if you take it out during retirement.

4) You don’t have to report anything to the IRS. If you set up another account, e.g. For example, a 401(k) requires you to go through a lot of paperwork and non-discrimination testing every year. There are not the same requirements for a SEP IRA.

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5) A SEP IRA has flexibility in how much you can contribute each year. Let’s say you made $10,000 last year and this year you feel like you know what? I would like to go to Finland and see the Aurora Borealis and maybe also bring my brother or loved ones and pay. And I could just put $1,000 in my SEP IRA this year. It really depends on you. It gives you a lot of flexibility.

Find out where to open an account. You may need to select an option to see all available account types to find the SEP IRA. Since not everyone can contribute to one, you might not have it on the main options screen. Then simply follow the instructions to open the account.

The other important thing you need to do to create a SEP IRA that many people forget is that you need to fill out what is known as a Form 5305-SEP.

Now you’re probably thinking I thought there was no paperwork. What is this form I should fill out? Well, it’s only half a page long and pretty simple. Don’t let that intimidate you. You just have to sign and date it. You don’t even have to send it to the IRS. You only have to submit it for your own documentation so that you have it in case you get audited.

Planning For Retirement As A Small Business Owner

If you read the official IRS website now, you will learn that you can contribute up to 25% of your total salary up to the IRS maximum. In our experience, after adjustments, it’s actually around 18%. Just keep in mind exactly how much you can contribute if you want to maximize your SEP IRA.

The main limitation of a SEP IRA is that technically it is the employer who makes the contributions. If you’re self-employed, you’re both an employee and an employer, so that’s not a problem. But if you’re a W2 employee and let’s say you put 18% of your salary into your SEP IRA. The rules also require you, as an employer, to contribute 18% of your W2 employee’s total wages to your SEP IRA. For many small business owners, this is probably too much of an employee benefit. This is where SIMPLE RAGE comes in.

The second small business retirement plan option is an Employee Savings Incentive Matching Plan (SIMPLE IRA). Employers (including the self-employed) can contribute if they have no more than 100 employees who earned more than $5,000 in the previous year. Employees can have their contributions deducted from their salary and the money grows tax-free until they retire. If you are a small business owner and have a W2 employee, a SIMPLE IRA may appeal to you. There are five main characteristics of a SIMPLE IRA that are very similar to a SEP IRA.

3) It has flexible investment options. If you open it with the right institution, you can buy almost any ETF or mutual fund you want.

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4) The really great feature here is that you can offer this as a retirement plan for your W2 employees. And you might be wondering, what’s so great about that? Well, there are actually 40 million private sector workers in this country who don’t have access to a pension. Therefore, it is very important to set up a pension scheme that you can pay into and that you can also give your employees the opportunity to participate in. The cost to you as an employer is really only 2-3% of your employee’s salary. You must provide some type of match with this SIMPLE IRA. It’s almost like giving your employees a 2% or 3% raise, it’s not that much

5) With SIMPLE IRA, you do not have to be a W2 employee to open a SIMPLE. If you are the only employee in your practice, you can also contribute to a SIMPLE IRA. You must also complete Form 5305-SIMPLE. Again, this is a very short form, half a page. You do not need to register with the IRS, just sign, date and keep. For 2022, you as an employee can contribute up to $14,000 plus the employer contribution. This is an increase from $13,500 in 2021.

A SIMPLE IRA allows both the small business owner and the employee to contribute. In comparison, a SEP IRA only allows business owners to make contributions for themselves and their employees.

Which might be best for you if you are self employed or have a small business? Let’s assume you are a high earner and your salary is already in the six-figure range. I am sure you have put a lot of blood, sweat and tears into building your small business or practice. congratulations to you If your goal is to put as much money as possible in a tax-advantaged account, a SEP IRA may be more appealing to you because you can deposit a percentage of your paycheck. Another thing that speaks for SEP IRAs is that they are much easier to open online.

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On the other hand, if you are just starting your business and have a moderate income, say around $40,000, a percentage of that will be much less. Therefore, an EASY IRA may be more attractive to you as it is an absolute number that you can contribute if your goal is to return as much money as possible to this tax-deferred account. As mentioned above, if you have or plan to have a W2 employee, a SIMPLE IRA may be a better fit for you as your obligations as an employer are much less compared to a SEP IRA.

Now there’s actually another retirement plan for small business owners and self-employed people that we haven’t talked about yet. This plan is either an individual 401(k) or an individual 401(k). And if you’re interested in making climate-friendly investments for your SEP IRA or SIMPLE IRA, be sure to watch our fossil-free investing video.

Alvin Carlos, CFP®, CFA is a fee-based investment advisor and financial planner based in Washington, D.C. who works with clients

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