While most Americans would agree it’s important to have a nest egg to draw upon when they retire, the simple fact is many of us aren’t saving nearly enough to be financially comfortable when the time comes. That’s the conclusion drawn by experts who have studied the topic, and suspect retirees will be subject to a lower standard of living — or more years in the workforce — due to a dearth in adequate savings.
Bankrate.com recently reported that only one in four Americans are saving more than 10 percent of their paychecks each year; meanwhile, the financial services company recommends people put at least 15 percent of their annual income toward planning for their golden years. While retirement savings tools such as 401(K) plans have surged in popularity in recent years, another retirement plan, known as a Simplified Employee Pension, can provide a healthy source of income for participants — and is easy to set up, and flexible as far as contributions and deadlines.
What is a Simplified Employee Pension?
A Simplified Employee Pension, or SEP, is a retirement plan that employers can set up, whereby contributions are made to an Individual Retirement Account for each employee. Contributions are made at the discretion of the employer, who can contribute up to 25 percent of an employee’s earnings to the account (or up to $53,000 per year). (Employees are not permitted to make contributions.) Employees are eligible to participate if they are 21 years old or older, have worked for the company for at least three of the past five years, and have earned $600 in compensation in the last year.
Self-employed individuals also can benefit from a Simplified Employee Pension, and in fact, many investment professionals tout these plans as being among the best retirement savings options for the self-employed, a third of whom, according to TD Ameritrade, aren’t saving for retirement at all. The same rules apply to these individuals as to small businesses as far as contribution limits and deadlines.
To sign up for a Simplifed Employee Pension, employers or self-employed persons should use Form 5305-SEP or an IRS-approved prototype SEP. The SEP-IRA can then be set up for each employee through a bank, financial institution or insurance company.
Advantages of Using a Simplified Employee Pension Plan
There are numerous advantages for those using a Simplified Employee Pension as a retirement savings tool. For instance, any business can participate, regardless of size, and employers generally have no filing requirements. The flexible nature of the plan means employers can contribute throughout the year, or make a once yearly payment (up to the due date of the business’ tax return).
Also, since the employer sets the contribution amount, if times are tough, he or she can choose to contribute a smaller amount during a given year, and can up that percentage when finances improve. On the other hand, while there is a contribution cap, employers can put more money toward SEP’s than other types of IRA’s. An added benefit: contributions are tax-deductible for the employer or self-employed person, and the money grows tax-deferred until retirement.
Things to Consider
Employers are required to contribute uniformly to all employees’ SEP’s; that is, they must contribute the same percentage of salary for all participants. For a given calendar year, it’s also incumbent upon employers to contribute to accounts of participants who no longer work for the company on the last day of that year — if those workers would otherwise be eligible for a contribution.
Unlike some other retirement plans, employees are not able to make their own contributions. Therefore, employees are advised to consider alternative savings methods if they choose to set their money aside for retirement. And SEP’s do not allow people 50 or older to invest more than young people in an attempt to “catch up.”
Also, while money can be withdrawn anytime, participants will face a 10 percent penalty if they remove funds before they are 59 and a half. Loans are not allowed period. And those participating are required to start withdrawing money from SEP’s by age 70 and a half.
Contact The Business Benefits Group For More Information
To learn more about Simplified Employee Pensions or BBG’s other valuable retirement plans, contact the Business Benefits Group by sending a message online or by calling us today. We provide complimentary professional consultations so that you can communicate your goals and expectations.