It’s Not Over, ‘Til it’s Over…………….
The year’s end has come and gone and nearly all of us will be forced in the next few months to focus on our 2017 income tax filing. The conventional wisdom says that it’s too late to do anything about our tax liability for 2017 since December 31, 2017 is just a distant memory. But is that truly the case?
Not completely! Business owners may be able to take action prior to their tax filing deadline in 2018 and yet still reduce their income tax liability for 2017. And, in the process, this same business owner can enhance the retirement preparedness of himself (or herself) and most employees.
Enter the SEP IRA, which stands for Simplified Employee Pension Individual Retirement Arrangement. Basically, this is a retirement plan for individuals to which an employer contributes. SEPs are easy to adopt and generally simple to administer and provide employees with the tax-deferred retirement savings benefits of a qualified plan, such as a 401(k) or 403 (b). Under today’s rules, only the employer can contribute to an individual’s SEP IRA.
Several rules control SEP IRA’s but they are generally far simpler than 401k’s. The maximum that an employer can contribute to an individual SEP account cannot exceed the lesser of 25% of an employee’s compensation or $54,000 for the 2017 tax year. Employee salary deferrals are not permitted nor are catch-up contributions. Employees are always 100% vested and completely control their accounts, even after they terminate employment. In order to start the process, the employer merely completes IRS Form 5305-SEP and signs it prior to the tax filing date (plus extensions) for the year in which the SEP is to take effect. The form does not have to be sent to the IRS or any governmental agency. Thus, an employer wishing to lower their 2017 tax liability can do so by establishing the SEP as late as their 2017 tax filing deadline, plus extensions, which would take place in the calendar year of 2018.
There are some additional rules to consider and some coverage requirements for employees, but SEP IRA’s do provide flexibility. Employers whose business fortunes ebb and flow find SEP’s useful, because contributions are not mandatory and can be skipped in a down year. IRS Publication 560 Retirement Plans for Small Business (SEP, SIMPLE and qualified plans) and Publication 4333 SEP Retirement Plans for Small Businesses provide greater details about these versatile tools.