Now leaving ThriventFunds.com

 

You're about to visit a site that is neither owned nor operated by Thrivent Asset Management.

In the interest of protecting your information, we recommend you review the privacy policies at your destination site.

Financial Professional Site Registration

Complete this form to get full access to the entire financial professional site.

By clicking “Register”, you agree to our privacy and security policies and that you are a financial professional.

Access will be granted immediately, but the registration process may take up to 5 business days to complete.

Thank you for registering

You can now enjoy all financial professional content.

If your download does not start automatically, click here.

An error occurred

Please check back later.

Gene Walden
Senior Finance Editor

CLIENT EDUCATION

A low-cost retirement plan for small business owners

12/22/2020
By Gene Walden, Senior Finance Editor | 12/22/2020

 

Small business owners can offer employees (and themselves) a tax-deferred retirement savings plan similar to the plans offered by larger corporations – but without incurring the high start-up and operating costs of a conventional retirement savings plan such as a 401(k).

A Simplified Employee Pension Plan (SEP) is similar to corporate retirement plans such as 401(k)s in that:

  • Both are funded with pre-tax contributions
  • Investments within both plans grow tax-deferred
  • Withdrawals in retirement are taxed at your ordinary income rate in the year of the withdrawal

However, there are also some important differences. While 401(k) plans are funded with the pre-tax compensation from employees (sometimes supplemented with a full or partial match by the employer), all contributions made to a SEP must come from the employer on behalf of the employees.

An employer could make an annual contribution of up to the lesser of 25%1 of each employee’s compensation2 or $57,000 for 2020 and $58,000 for 2021.

Here are several other key facts to know about a SEP for small business owners:

  • If the employer makes contributions on their own behalf, they must also make contributions on behalf of all eligible employees.
  • Employees are always 100% vested in (or, have ownership of) all SEP-IRA money.
  • The employer can adjust the contribution each year as the situation warrants.
  • Any employees who are at least age 21 years old and worked for you at any time in three out of the prior five years must be included in the SEP plan.
    • For instance, someone who worked for you in 2015, 2017 and 2018 would be eligible for your plan, and you would be required to make a contribution for him or her for the 2020 plan year.
    • If you want to stash away 15% of your compensation for yourself, you must also contribute an amount equal to 15% of that employee’s compensation to his or her SEP IRA. Although the contribution comes directly from the company rather than from the employee’s wages, the employees own and control their own accounts.
    • If you are an employee with a SEP IRA account, you can:
      • Keep your money in the SEP IRA
      • Transfer your money to a Traditional IRA, Roth IRA (this is a taxable event), or another SEP IRA
      • Roll over your money to another SEP IRA, a 401(k), a 403(b) or 457(b) account in which you participate if the receiving plan accepts rollovers.
  • Participants must start taking required minimum distributions (RMDs) in the year they turn 72. (See: SECURE Act alters retirement investing options for individuals and businesses)
  • Employees who take a distribution before age 59 ½ would be required to pay income taxes and possibly a 10% early distribution penalty. The 10% penalty may not be imposed if certain conditions apply, such as a permanent disability. The money may also be used for a down payment for first time home buyers or to help pay your children’s higher education costs. See the full list of exceptions.

Self-employed individuals can also open a SEP plan for their retirement savings. (See: Self-employed workers can also benefit from tax-deferred retirement plans)

How to set up a SEP for your business

Establishing a SEP for your business involves maintaining a plan document. The IRS provides a prototype document called the 5305-SEP, Simplified Employee Pension.  That is a matter that you may choose to handle through your tax advisor or on your own. (For more details, see IRS article How do I establish a SEP?)

Once your business has completed the required IRS form, you and your employees would be able to open SEP IRA accounts with a qualified financial institution to receive the contributions and enable participants to invest their funds. While contributions come from the employer, each employee owns and controls their own SEP IRA account.

Thrivent Mutual Funds offers a SEP IRA that enables you to choose from all-in-one investments or build your own allocations according to your specific objectives. Whether your goal is accumulation or distribution, Thrivent Mutual Funds offers simple solutions to diversify investments based on your risk tolerance.




1 Self Employed owners who file Schedule C are limited to 20% of net earned income

2 For Schedule C filer, it would be net earned income; for Schedule C or Sub S Corporation filer, it would be W-2 income.

The information provided is not intended as a source for tax, legal or accounting advice. Please consult with a legal and/or tax professional for specific information regarding your individual situation.


Related Reading

March 2021 Market Update

03/05/2021

Bond yields and personal income both surge

Bond yields and personal income both surge

Bond yields and personal income both surge

Bond yields took a big leap in recent weeks over inflation concerns, with the yield on 10-year U.S. Treasuries moving up from 1.09% at the end of January to 1.46% at the February close. Rising bond rates in the past have sometimes had an adverse effect on stocks. The more attractive bonds become, as their yields rise, the more likely it is that money will begin flowing out of stocks and into bonds.

Bond yields took a big leap in recent weeks over inflation concerns, with the yield on 10-year U.S. Treasuries moving up from 1.09% at the end of January to 1.46% at the February close. Rising bond rates in the past have sometimes had an adverse effect on stocks. The more attractive bonds become, as their yields rise, the more likely it is that money will begin flowing out of stocks and into bonds.

03/05/2021

03/05/2021

Bitcoin – Bonanza or fools gold?

Bitcoin – Bonanza or fools gold?

Bitcoin – Bonanza or fools gold?

Bitcoin has captured the imagination of the investment world alongside “meme” stock trading (GameStop) and stocks of companies identified as “disruptors.” In fact, bitcoin is considered by some to be the ultimate “disruptor” financial creation. Furthermore, nothing fuels the imagination better than something that goes up five-fold in value in just six months!

Bitcoin has captured the imagination of the investment world alongside “meme” stock trading (GameStop) and stocks of companies identified as “disruptors.” In fact, bitcoin is considered by some to be the ultimate “disruptor” financial creation. Furthermore, nothing fuels the imagination better than something that goes up five-fold in value in just six months!

03/05/2021

Market Update [VIDEO]

03/05/2021

Macro environment: Plotting the course for 2021 [VIDEO]

Macro environment: Plotting the course for 2021 [VIDEO]

Macro environment: Plotting the course for 2021 [VIDEO]

David Royal, Chief Investment Officer for Thrivent and Mark Simenstad, Chief Investment Strategist for Thrivent Asset Management discuss equity vs. fixed-income, rotation into cyclical stocks, and how Thrivent Asset Management approaches tactical allocation.

David Royal, Chief Investment Officer for Thrivent and Mark Simenstad, Chief Investment Strategist for Thrivent Asset Management discuss equity vs. fixed-income, rotation into cyclical stocks, and how Thrivent Asset Management approaches tactical allocation.

03/05/2021

03/05/2021

Inflation - Is it returning, or another false alarm?

Inflation - Is it returning, or another false alarm?

Inflation - Is it returning, or another false alarm?

Inflation has dramatically declined and remained subdued for over three decades since peaking at over 13% in early 1980. Interest rates, which closely follow the path of inflation, have also declined dramatically.

Inflation has dramatically declined and remained subdued for over three decades since peaking at over 13% in early 1980. Interest rates, which closely follow the path of inflation, have also declined dramatically.

03/05/2021