A simplified employee pension (SEP) is a special kind of individual retirement account (IRA) that small entrepreneurs and self-employed professionals can establish. The scheme enables them to make yearly monetary contributions from their business funds for their employees’ retirement. They can even open and deposit money into the plan to build up a sizeable fund for their retirement. The entrepreneurs and professionals also claim certain tax deductions for their businesses on their contributions to the SEP IRA plan. These benefits minimize their taxable business income and overall corporate tax liability in a specific financial year.
Robert Nico Martinelli – Who can participate in the SEP-IRA scheme?
Robert Nico Martinelli is a financial expert from the United States specializing in retirement tax planning. He assists young working professionals, entrepreneurs, companies, recent retirees, and pensioners build their retirement funds. The tax-exempt interest they earn from the wealth enables them to enjoy a financially comfortable post-retirement lifestyle.
The simplified employee pension scheme is for small entrepreneurs, partnership firms, corporations, self-employed professions, and non-trading entities. These individuals or organizations should have a few or hardly any employees on their business payroll. Moreover, the workers should meet the following IRS eligibility requirements to participate in the scheme:
- They should be 21 years,
- All of them should be in the service of the current employers for at least three consecutive years,
- They should receive an annual remuneration of at least $650 from their employers.
Unlike traditional IRAs, entrepreneurs, corporations, or self-employed professionals do not control the investments under the SEP scheme. The employees on their business payroll have absolute ownership and control over the financial assets. Moreover, the employers are obligated to make equal money contributions to the eligible employees on their payroll, including themselves.
Why open a SEP IRA scheme?
Small entrepreneurs can open a SEP-IRA scheme with any commercial bank, mutual fund company, insurance firm, or financial brokerage institution. However, they first need to fill up a written agreement in Form 5305-SEP and submit it to the financial service provider. It is a legally binding document emphasizing their willingness to provide equal monetary benefits to eligible employees. It contains the following important information relating to their businesses:
- The name of the employer,
- Employer Identification Number (EIN),
- Conditions for the employees’ participation in the scheme,
- The relevant allocation formula, and
- The signature of the official responsible for processing the SEP-IRA application
The entrepreneurs and their employees can invest the funds which accumulate in the SEP-IRA scheme numerous financial assets. These include mutual funds, individual company stocks, corporate bonds, and exchange-traded funds.
According to Robert Nico Martinelli, opening a SEP IRA scheme is a practical way for small entrepreneurs to save for their employees’ and own retirement. The funds they deduct from their employees’ remunerations and deposit into the scheme attract high tax deductions. Moreover, the funds in the plan earn interest at a compounding rate on a tax-deferred basis. This benefit helps to reduce their taxable business income and tax liability significantly.