If you’re self-employed or own your own business with or without employees, you might want to look into opening a Simplified Employee Pension Individual Retirement Account (SEP IRA) or a Savings Incentive Match Plan (SIMPLE).
These tax-advantaged retirement plans can save you big!
For starters, both allow you to contribute pre-tax dollars, reducing your taxable income:
- SEPs’ benefits include minimal setup and management costs. Additionally, they also offer flexibility — you can set one up regardless of the number of employees you have.
- Saving through a SEP allows you to turbocharge your retirement savings. These plans require a mandatory annual employer contribution of 25 percent of a participant’s annual compensation. That is up to a maximum amount of $61,000, whichever is less. Compare that with the annual contribution limits for traditional IRAs ($6,000), and for 401(k), 457(b), and 403(b) plans ($27,000 a year, for those age 50 and older).
These higher contribution limits can make a huge difference:
- SIMPLE plans are, surprise, inexpensive and straightforward to administer. If you’re eligible to set up and/or have access to a SIMPLE IRA, you can contribute up to $14,000 to it this year (the IRS makes an annual cost of living adjustment). If you’re over 50 years old, you can kick in an extra $3,000 a year in catch-up contributions for a total of $17,000 for this year. These plans come with a few catches. Also, they are only permissible in companies with fewer than 100 employees. Companies with SIMPLE plans (and those with SEPs) also can’t offer any other retirement plan.
- Employers who offer SIMPLE IRAs must either match employee contributions dollar-for-dollar. This is at a minimum of 1 percent to a maximum of 3 percent. Or they can make a fixed employer contribution of 2 percent of employee compensation.
- If you take an early distribution within the first 2 years of being enrolled, you’ll face a 25 percent tax penalty. Ouch!
Just as with IRAs, once you reach the age of 72, you must take required minimum distributions from both SEP and SIMPLE accounts.
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Source: Travel Awaits