With this blog post I’m beginning a two-part series about retirement savings plans available to the small business owner. Earlier Jonathan and I have written about the Traditional IRA and the Roth IRA. In this piece I’m going to explain the Simplified Employee Pension, or SEP IRA. It is best used in a small shop, with few (or no) employees. It can be established by an individual proprietor, filing a Schedule C, or by a corporation, LLC, or partnership.
The SEP – Simplified Employee Pension
The SEP is designed for the business owner with few employees. Money goes into the SEP from employer contributions only. All contributions are tax-deductible to the employer. There is no opportunity for employee deferrals. A SEP IRA account is opened for each participant, and all funds contributed are immediately vested. (There is an older version, called a SARSEP, or salary reduction SEP. Although many are still out there, they cannot be opened after 1996.)
The employer must...
Employer-sponsored retirement plans can be split into two groups:
As the name suggests, the salient feature of any defined contribution plan is the input – how money goes into the plan. Money goes in from both employer contributions and matching, employee deferrals, and forfeitures from those not vested. On the other hand, the DC plan is defined not by the inputs, but rather than by the output. The FRS Pension option is a defined benefit plan. I explain this a little more fully in my video(below).
With any defined benefit plan, all the investment risk is with the employer and not the participant. When I say the risk is with the employer, I mean the State of Florida. FRS invests the retirement plan assets in such a way that it is able to pay out what has been promised. The employer is guaranteeing the participant a fixed income for life, regardless of whether underlying investments do well or poorly....