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

If you’re self-employed, you can still benefit from a tax-deferred retirement plan

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

 

You don’t have to work for a big corporation to enjoy the same type of tax benefits that many corporate employees experience with their company retirement plans. If you’re self-employed, you can open a Simplified Employee Pension Plan (SEP) that may allow you to contribute thousands of dollars each year to a tax-deferred account.

SEPs are similar to 401(k) and other corporate retirement plans in that both are funded with money you make before taxes, or pre-tax contributions. Investments within both plans grow tax-deferred, and withdrawals in retirement are generally taxed at your ordinary income rate in the year of the withdrawal. A SEP plan can be established and maintained each year with less cost and administrative effort on your part.

If you’re self-employed, here’s some info you might want to know about these popular plans:

  • You may contribute up to 25%1 of your compensation2 or $57,000 (whichever is less) for 2020 and $58,000 for 2021.
  • You can contribute to a SEP every year you are self-employed and have earned income, regardless of your age.
  • You can adjust your contribution amount each year as the situation warrants.
  • You have until your business’ tax filing date plus extensions to set up and fund a SEP.3

If you take a distribution before age 59½, you would normally be subject to income taxes and a 10% early distribution penalty, although certain exceptions apply. The 10% penalty may not be imposed if the following conditions apply:

  • You are totally and permanently disabled.
  • You (and your spouse) are a first-time home buyer(s), in which case you can use up to $10,000 from your SEP to make a down payment on a home.
  • You are using the distribution to cover unreimbursed medical expenses.
  • You use the money to pay health insurance premiums while you’re unemployed.
  • You use the money for qualified higher education expenses.
Although you would not pay a penalty on money withdrawn after 59½ (or if you qualify for an early distribution exception), you would owe taxes on all distribution at your ordinary income rate for the current tax year.

Other SEP guidelines

If you hire any employees, some other requirements would apply. For instance:

  • Contributions are only made by the employer, no employee contributions are allowed.
  • If you have any employees who are at least age 21 and worked for you at any time in three out of the prior five years, they must be included in the SEP plan.
  • If you contribute on your own behalf, you must also contribute on behalf of all eligible employees.
  • Employees are always 100% vested in (or, have ownership of) all SEP-IRA contributions.

How to set up a SEP for your business

Establishing a SEP for your business starts with maintaining a plan document. The IRS provides a prototype document called the 5305-SEP, Simplified Employee Pension form.  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 established the SEP Plan, you would be able to open a SEP IRA account with a qualified financial institution to receive your contributions and provide investment choices, such as mutual funds, in which to invest your funds.

A SEP plan can put you on the road to retirement with tax benefits similar to those of corporate retirement plans. You can open a SEP IRA today through Thrivent Mutual Funds and start saving for your retirement.

 


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.

3 IRS.gov, Retirement Plans FAQs regarding SEP contributions

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