A Simplified Employee Pension plan is one of the most popular savings plans for self-employed and small business owners. Most business owners focus on the day-to-day activities of their enterprises and forget about their retirement plans. The Simplified Employee Pension Plan offers business owners and sole proprietors an affordable saving vehicle with the following benefits:
Reduced Tax with Deductible Contributions
Small businesses with the SEP IRA plan enjoy reduced tax bites with deductible contributions. The businesspersons are allowed to take a federal deduction equal to the amount contributed by their employees. This figure is capped at 25% of the compensation made during the year. Alternatively, sole proprietors or self-employed individuals can take up to 20% of their net earnings after removing expenses.
The SEP plan contribution limit is $50000 or 25% of the compensation for that given year, or whichever is less. Conversely, self-employed individuals contribute up to 20% of the expected compensation. Therefore, the contribution limit helps maximize savings for small businesses.
Benefit from Flexible Funding and Tax-deferred Compounding
SEP plans allow small businesses to decide what amount to contribute each year. In addition, the plan will enable them to choose whether to skip the contributions. Aside from flexible funding, SEP plans offer tax-deferred compounding. This is true for capital gains and dividends earned from the money contributed to SEP.
The SEP IRA provides a win-win opportunity for the business and its employees. It allows self-employed individuals to prepare for the future and prepare their employees for retirement.
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