A SEP-IRA is one of the easiest retirement plans for small businesses to set up and maintain. You can make significant contributions for yourself and any eligible employee. There is little administration and no tax return is necessary. And you can vary contributions from year to year or even skip a year.
The biggest drawback of a SEP IRA, for employers, is the requirement that employers' salary percentage contributions match those of employees. In most cases, your maximum allowable contribution equals just under 20% of your gross income. The self-directed SEP IRA has the same limits and rules as a normal SEP, but allows investments in alternative assets. A SEP-IRA can be opened and contributions made until the employer's actual tax filing deadline, including extensions.
It would allow the worker to fully contribute to their employer's 401 (k) plan and use the SEP IRA to earn self-employment income. Because that rule requires equal contributions as a percentage of compensation, a SEP IRA is generally better for self-employed individuals or small business owners with few or no employees. With a self-directed SEP, employee John Doe can decide where and what to invest in, although he cannot make any additional contributions as an employee, the account is his sole property and is under his control. A SEP IRA would be a good option for someone with a side job outside of their regular job, says Mark Beaver, CFP from Dublin, Ohio.
Employees cannot change their SEP IRA plans without a penalty until they are 59 and a half years old. And whatever percentage of compensation employers set aside in the plan for themselves is the same percentage of the salary they must contribute for each eligible employee. Once you've established that you qualify to open a Roth IRA, you need to do some research to determine where you want to open your IRA. The custodian establishes an individual retirement account (IRA) for each employee for the employer to make contributions.
The deadline to set up a SEP IRA is April 15 or your company's tax filing deadline, including extensions. Participants in the Simplified Wage Reduction Pension Schemes (SARSEP) established prior to 1997 were entitled to make optional salary deferral contributions. If you have employees who meet certain criteria, you must calculate the percentage of your salary that contributes to your own SEP IRA account and contribute that same percentage of your employees' salaries to your SEP IRAs. If you're self-employed or self-employed and don't pay yourself a salary, then determining your maximum allowable contribution to the SEP is a little more complicated, but it tends to be just under 20% of your gross income.