It is not too late to fund a SEP IRA

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 03/27/19

It is not too late to fund a SEP IRA

Small businesses — those with fewer than 100 employees — comprise the majority of businesses in the United States. While most small-business owners agree that retirement benefits are important (Pew Research), they are less likely to offer a retirement plan largely due to cost and administration.

Many sole proprietors also face challenges when saving for retirement.

A Simplified Employee Pension (SEP) IRA can provide an opportunity for small businesses and sole proprietors to establish a retirement savings plan. Funded with pretax dollars, the contribution to a SEPIRA offers a tax advantage to investors.

There is still time to fund a SEP IRA. Investors have until the tax-filing deadline to make a contribution for the previous year. The deadline for filing 2018 taxes is April 15, 2019.

The contribution limit for 2018 is $55,000. The limit increases to $56,000 for 2019 contributions.

SEP IRA accounts offer several benefits:

• Contributions are tax deductible.

Investors may take a federal income tax deduction equal to the amount of their employer contributions, up to a maximum of 25% of compensation paid during the year. For self-employed individuals, the deduction is limited to 20% of net earnings after expenses.

• High contribution limits may help maximize retirement savings.

The contribution limit for 2018 is $55,000 or 25% of compensation, whichever is less. Self-employed individuals can contribute up to 20% of compensation.

• Contributions are discretionary.

Employees can decide how much to contribute, and the amount can vary from year toyear. Employees may also skip a year. For business owners, contributions must be nondiscriminatory, and the same salary percentage must be contributed to each eligible employee’s account.

Employee retention

Offering a retirement plan may help attract and retain talent. Benefits, including a retirement savings plan, are important considerations for job seekers. A recent survey found that 80% of employees noted that benefits were more important than a pay raise. The response was even higher among Millennials (ages 18 to 34), with 90% citing a preference for benefits over pay. Many respondents cited a focus on long-term benefits, including access to a retirement savings plan.

With the 2018 tax-filing season under way, advisors may want to reach out to small-business owners and sole proprietors to discuss retirement savings options, including a SEP IRA.

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