FML partner Eliot Bassin was recently quoted by The Wall Street Journal in an article about SEP IRAs. An SEP is a simplified employee pension, which is a retirement plan for business owners and the self-employed. It permits contributions to individual retirement accounts (SEP IRAs) for the employer and eligible employees.
As part of Eliot’s wide range of expertise, he specializes in providing tax, audit and business advisory services to individuals and closely held businesses. FML uses SEP IRAs often with our small business clients. They are a great tool to help clients defer taxable income into future periods when they will likely be in a lower income tax bracket.
They also provide a fair amount of flexibility since they don’t require a set annual contribution. Employers can even decide to contribute $0 if they have a bad year. The biggest drawback is that the SEP is considered an employer-sponsored plan. The article quotes Eliot on this:
Business owners with employees may find SEP IRAs difficult to manage, as they’re required to contribute to the accounts of all eligible workers at the same rate that they contribute to their own.
“That can add up quickly when you have employees,” says Eliot Bassin, a tax and business advisor at Fiondella, Milone & LaSaracina, an accounting firm in Connecticut.
The article later elaborates:
SEP IRAs can get expensive if you have to cover additional employees’ retirement savings, because your savings are limited by the amount you can afford to save for everyone. “If you’re anticipating that you’re going to bring on employees fairly quickly, a SEP may not be the best alternative because you’re solely responsible for funding those contributions,” Bassin says.
There are certain rules for withdrawing from a SEP IRA account. For instance, withdrawals taken earlier than age 59½ trigger a 10% penalty. In this excerpt quotes Eliot on required minimum distribution:
When you turn 73, you need to start withdrawing a minimum amount each year from your SEP and traditional IRAs. The required minimum distribution, or RMD, rule also applies to 401(k)s and 403(b)s.
RMDs are calculated by taking your eligible account balances and dividing by a life expectancy factor provided by the IRS. “The SEP IRA is going to be included in that mix to determine how much you have to take out each year for your RMDs,” Bassin says.
Like traditional IRAs, a SEP IRA can also be converted to a Roth IRA. You pay income taxes on the balance at the time of conversion and are left with a pot of tax-free money to draw on in retirement. A benefit of Roth IRAs is that they don’t mandate annual withdrawals.
Read the full article from The Wall Street Journal.
