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.
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.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.