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SEP IRA Rules and Contribution Limits (GoodFinancialCents.com) - YouTube
Channel: Wealth Hacker - Jeff Rose
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This is Jeff Rose, goodfinancialcents.com.
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Are you a small business owner that wants
to set up a retirement plan for your business,
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but just have no clue on which is the right
one for you?
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If you are, don't worry.
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I was in that exact same situation.
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Today I want to talk about the SEP IRA and
what it is.
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I want to tell you some of the benefits of
how it might be a good fit for your business
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and also when a SEP IRA might not make the
most sense for you and your set up.
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First of all, what is a SEP IRA?
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A SEP IRA stands for simplified employee pension.
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It's a lot of words, but basically it is a
retirement plan that is set up specifically
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for small business owners.
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It allows you to put in a lot more than you
can in your traditional or Roth IRAs, and
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that is where we start with the first benefit.
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Some of the first benefits of the SEP IRA
are like I just mentioned; you can put in
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up to $49,000 per year into it.
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Obviously that far exceeds the $5,000 or $6,000
that you could do into a traditional or Roth
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IRA.
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So $49,000 is a big chunk of change to be
able to deposit in one year.
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How does that calculation work though?
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Here is where it gets a little bit tricky.
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If you're an S corporation or a C corporation
or if you're an LLC that is going to be taxed
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as a corporation, than you can do 25% of your
W2 wages.
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Whatever income you decide to pay yourself
out of your corporation, you would then take
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25% of that, which then determines how much
you can put into the SEP IRA.
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To be able to put the full $49,000 into a
SEP for any given year, as you can see you
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have to have a pretty handsome wage or income
to be able to do so.
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If you're a sole proprietor like I have been,
then instead of taking 25% of your wages,
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you take 20% of your net income.
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That is how you determine how you can put
into it.
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As you can see even though we are only taking
percentages of wages or net income, the amount
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you can put in far exceeds what you can do
in a traditional or Roth IRA and also the
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simple IRA, which I would call the stepchild
of the SEP IRA.
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One of the other benefits of setting up a
SEP IRA for your business is just that; they
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are easy to set up.
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Compared to setting up a traditional 401K
or even a solo 401K is there is a lot more
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IRS documentation, most commonly known as
the IRS form 5500, that you have to file each
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and every year when you set up a solo 401K
or a traditional 401K.
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With a SEP IRA it is not an ERISA-ran plan
so therefore there is no extra IRS documentation.
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It really is just a simple form that you fill
out and you're good to go.
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Another benefit of setting up the SEP IRA
is that it's very, very inexpensive to set
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up.
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Most solo 401Ks or traditional 401Ks are going
to have a set up cost and it differs with
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all the different carriers.
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Let's say on the low end $150.
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I have seen some on the higher end of up to
$800, sometimes up to $1,500.
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With a SEP IRA there is no set up cost.
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Typically the ongoing fee that you pay is
the IRA custodial fee that you'll pay with
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a brokerage firm.
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This can be as low as $40, on the high side
maybe in the $75 range depending on where
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you go.
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Obviously if you're using an on-line provider
it most likely is going to be a little bit
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cheaper than that.
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Nonetheless, since you don't have to file
those extra forms with the IRS, the annual
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maintenance of that SEP IRA is very, very
inexpensive.
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One of the benefits I personally love about
the SEP IRA is that you are not bound to the
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same deadlines of putting your money in like
you are a traditional or Roth IRA.
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As most of you know, you have typically until
April 15 of the following year to put in your
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contributions of your IRAs.
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For next year, for example you have until
April 15 to max out your IRA.
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With the SEP IRA you don't have until April
15.
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You actually can file an extension for your
business and then you have until October 15
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of that year to make the contribution for
the previous year.
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Let me give you a personal example.
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Every year for my business I always file an
extension because I like to see where I'm
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going to be at income-wise.
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If I think that I'm going to be at a higher
income level the following year, instead of
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putting a big chunk in for the previous year
I'm going to put in less last year and more
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in this year so I save more income tax.
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No other retirement plan have I had where
I have that ability to see where I'm going
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to be at income-wise.
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You figure by October 15 of the following
year you know where you're going to be at
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with income for the following year.
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That gives you enough time to gauge and see
what's going to make the most sense for you
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and your business.
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Now that I've talked about the benefits of
the SEP IRA, let me give you a few examples
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of when a SEP IRA might not make as much sense
for you.
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In one area the SEP IRA might not make sense
is if want to be able to put more money in
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without being subject to that calculation
we talked about earlier.
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In that case, that is where a solo 401K might
make the most sense.
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With a solo 401K you do have those numbers
you have to figure, but before you do any
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calculations you can immediately deposit the
$16,500 into the solo 401K.
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That is an added advantage of the solo 401K
versus the SEP IRA.
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I will tell you that is something I am looking
at personally for the next tax year.
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Lastly, another situation that a SEP IRA might
not make sense is if you have several employees.
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Why, you ask?
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Because whatever percentage you decide upon,
say you've decided you want to put 15% of
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your net income into your SEP IRA.
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Whatever percentage that you decide for yourself
you have to do the exact same percentage for
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your employees based off their income.
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If you have one key employee it might not
make that big a difference, but if you have
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five or six and you're having to put 15% of
each of their income into their retirement
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plan it's immediately invested.
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That means that once you put it into their
account it's theirs.
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There is no taking it back.
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That might take some careful thought and planning
to see if those employees are right to be
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able to receive such a large chunk.
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You can legally discriminate on some of those
employees.
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Some of the factors are if they are under
the age of 21, if they only work so many hours
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a year, and if they have not been with your
company for a certain period of time.
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Be sure to check the blog for more of those
restrictions to see if they apply to you,
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but nonetheless it is still something you
want to consider before you start implementing
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a SEP IRA.
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I hope this was helpful in determining if
a SEP IRA is right for you and your business.
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If you have more questions, please feel free
to visit me at the blog of goodfinancialcents.com.
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If you're on Facebook be sure to check out
our Facebook page and give us the big thumb.
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I'd love to see you around there.
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This is Jeff Rose, Good Financial Cents.
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We'll see you again.
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