When running your small business or company, managing your resources and maximizing its full potential is vital to its success. All expenses must be cost effective, and employees should get the best benefits at lower costs. In choosing a retirement plan for your company, a SEP IRA should fit the bill perfectly.
Simplified Employee Pension
What is a SEP IRA? A SEP is a retirement plan that gives employers a simple way to give contributions to their employees IRA accounts. In essence, the SEP is a profit-sharing plan, where employees can receive more contributions to their accounts if business is doing well.
In order for an employee to be eligible for a SEP plan, he or she should be at least 21 years of age, has worked for the employer for 3 of the last 5 years and has a minimum annual salary of $500. The employee will setup the IRA account which will fall under the SEP (SEP IRA).
In a SEP, employers make the contributions. These contributions are discretionary; an employer can choose to contribute or not, and is free to give the amount he or she prefers, provided that it is within the plan’s contribution limits of $49,000 or 25% of the employee’s annual salary, whichever is less.
In a SEP IRA, required withdrawals start at 70 ½. Compared to other plans where withdrawals start at 59 ½, the SEP IRA allows the invested money more time to grow. Any withdrawal made before 59 ½ is subject to a 10% early withdrawal penalty plus the amount withdrawn will be taxed as ordinary income.
Because of the SEP IRA’s flexibility, not only do employees reap the benefits of bigger possible contributions from the employer, employers also enjoy the convenience of being able to choose when to make their contributions, which can potentially save a business during times of low profits.
A Roth IRA is a retirement account that is slightly different than other IRAs. The primary reason is because the money placed into a Roth IRA is taxed, but money withdrawn has no tax. Traditional IRAs are taxed when funds are withdrawn, not placed into the account.
Rules for a Roth IRA to be tax free are if the fund has been open for 5 years on principal withdrawals, and the individual is 59.5 on withdrawals on the growth portion above principal. Listed below are a few of the major advantages as well as disadvantages to having a Roth IRA.
The advantages to a Roth IRA include Roth IRA conversions from traditional IRAs. If there is money in a Roth IRA due to conversion from a traditional IRA, then the owner can withdraw the total amount of converted funds without penalty. This is as long as the seasoning period has passed, which is currently five years.
Also if an owner of a Roth IRA dies, then the heir to the plan can receive the funds while also holding their own Roth IRA. Even better, the beneficiary can combine their Roth IRA with the deceased with no penalty. Thus a single plan is created for the heir to benefit from.
Some of the disadvantages to a Roth IRA include, if a person has a high income level it can phase them from being able to contribute to a Roth IRA. Unlike most tax deductible employer based plans which allow any income level to contribute funds. Also If a person has a Roth IRA plan and dies before the funds are distributed, then they never benefit from the tax cuts available.
Granted when the funds pass to an heir there is no time limit for when the funds have to be taken out. Unlike a traditional IRA which states that at the age of 70.5 by April 1st funds have to be withdrawn. Therefore in a Roth IRA if a person dies before they can realize the tax benefits, it really does not benefit the individual, but it is good for an heir.