The COVID pandemic has caused many individuals to re-evaluate the desire to be a W-2 employee and to seek the benefits of self-employment. As great as that sounds, these individuals forgo the ability to participate in company-sponsored retirement plans (which are typically 401k or 403b plans). So, we often get asked what options are available to the entrepreneur to assist them with retirement savings.
The most common tool for a small business owner to obtain a 401k-type account is the Simplified Employee Pension Plan (more commonly known as SEP). This plan has many of the same benefits that employees receive when working for a company and contributing to their 401k plan. Here are a few benefits of a SEP plan: they provide tax-sheltered contributions, are easy to set up and manage, allow for flexible contributions based upon cash flow, have low administrative costs, and offer more investment flexibility.
The next consideration when evaluating SEP plans is the annual contribution limits as defined by the IRS. In 2022, SEP contributions cannot exceed 25% of the individual’s earnings, or $61,000 (whichever is less). The key thing to remember is that these are pre-tax contributions and therefore reduce an individual’s tax liability. These contribution limits are subject to change every year, so please consult with a financial advisor or tax specialist to see what applies for any given year. While this is a high-level summary, there are numerous other factors that need to be considered in deciding what type of plan is best for each individual or small business.
Seraphim Wealth Advisors specializes in the evaluation and implementation of retirement plans for self-employed individuals and small business owners. Please contact us for a more in-depth analysis.
Eric Wimbush, CFA