Retirement Plans for Self-employed & Small Business Owners

As many of my new Jacksonville friends are either self-employed or small business owners, setting up a SEP IRA might be a great solution to retirement planning.

The SEP IRA is a retirement plan designed to benefit self-employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify.

In 2010 a SEP IRA has a contribution limit of $49,000. Compare that with the $5000 limit on Roth and Traditional IRAs. Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes.

A SEP IRA has broad appeal due to its high annual contribution limits, completely discretionary and flexible annual contributions and minimal administration. SEP IRA plans can be established by a one person business or by a business owner with employees. But most frequently a SEP IRA is established by a business owner without employees.

The calculation of how much can be contributed to a SEP IRA is dependent on whether your business is a corporation and you receive a W-2 as compensation or if you are taxed as a sole proprietorship and receive compensation as personal income.

Business owner receives compensation as W-2 income. An S or C corporation, an incorporated partnership or a LLC electing to be taxed as a corporation pays the business owner a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner's W-2 salary up to the SEP IRA contribution limit. SEP IRA contributions are generally 100% tax deductible as a business expense.

Business owner receives compensation as personal income. When a SEP IRA is established for a unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income (or net adjusted business profits). SEP contributions are flexible and the percentage of contribution can be changed at any time and may be skipped in a bad year. SEP IRA contributions are generally 100% tax deductible from personal income.

A self employed business owner with no full time employees other than a spouse may also want to consider an Individual 401k as well as a SEP IRA.

• A SEP IRA allows a contribution of up to 20% of net self employment income or 25% of W-2 wages, but an Individual 401k frequently permits a larger contribution at the same income level and may allow a greater contribution. for 2010 Individual 401K contributions are limited to $16,500.
• Another feature of an Individual 401k versus a SEP IRA is an Individual 401k permits a loan up to 1/2 the value of the account up to a maximum of $50,000.

As always, it is best to discuss these options with your tax professional to determine the most advantageous plan for you.