|
How
does the tax part work for the SEP?
As long as you
keep under the contribution limits, you can
deduct all of your contributions into the SEP
account from your federal income tax calculations.�
Further, as the money in the account earns interest or
dividends, etc., it is left alone by the government...until
you withdraw it.��
Now,
a tax bummer:� The SEP contribution, while
deductible for federal income tax purposes, is
still subject to Social Security and Medicare taxes.�
If you are self-employed, this will mean that you have
to pay around 15.3% from ALL earnings before you make
your SEP contribution.��
Can
I contribute to other retirement plans in addition to
the SEP?
Yes!�
You can contribute to the ROTH Ira every year, no matter
what type of plan you have.� The Roth allows you to
contribute up to $2,000 per year per individual to a
separate retirement account.� This contribution is
not deductible like the SEP contribution, but it does
grow tax-deferred like the SEP.� (If you make over
a certain amount, you may not be eligible for the ROTH,
however...see our article in coming weeks in this series
for more info.)
However,
even more intriguing, is that you can use this plan for
moonlighting self-employment income!� In other
words, you can be self-employed part-time, contribute to
this plan, and still contribute to whatever plan your
employer has for you in your full-time job!��
|
|
Am
I REQUIRED to contribute each year to the SEP?
No!�
You decide every year if you want to contribute...and if
so, what amount, up to the maximum allowed.� But,
you can't "catch up" for previous years!�
Is
there a DEADLINE for setting up the SEP?
You
have
up until the date that you file your tax return (by
April 15), to contribute to your SEP for the previous
year.� If you get an extension to file, you
have until the last date of that extension to
contribute.��
When
can I start withdrawing the money?
When
you are 59 1/2.� If you withdraw before then, you
will be hit with a 10% premature withdrawal penalty,
unless you are permanently disabled or the withdrawals
are part of a series of withdrawals over 5 years
(consult a CPA for more on that).� Regardless of
when you withdraw, you will also be taxed on the
withdrawals.� The balance that you haven't
withdrawn yet continues to accumulate earnings tax free
until you withdraw it.� You must start
withdrawing from the account by age 70 1/2 or you will
get hit with a penalty tax from the IRS.�
Note:� You can't ever borrow from this
account!� So, if that is important to you, pick
another plan!
What
happens if I still have money in the SEP when I die?
When
you set up the plan, you select a beneficiary or
estate.� (The plan automatically terminates unless
your spouse is the beneficiary.)� If you die and
there is still money in the account, the money will
transfer to your
spouse...and they can elect to allow the plan to
continue to accumulate earnings tax free.� They can
also transfer the account into a new SEP or IRA and name
younger family members as beneficiaries.��
Wrap-Up
Bottom
line:� The SEP is a simple plan that could be a
great choice for you if you are self-employed and don't
have any employees.� Otherwise, the expenses of
covering employees may offset the benefits of this
plan...and other alternatives should be explored.�
For more on that, keep reading...we will probably cover
the plan that is right for you shortly!
�
|