Self Employed - The IRA Solution

Small business owners make up the backbone of the American workforce. Whether a sole proprietorship or a small business with just a few employees, these types of companies keep America running.Small business owners make up the backbone of the American workforce. Whether a sole proprietorship or a small business with just a few employees, these types of companies keep America running.

The owners of small business contribute greatly to the American economy but they don't qualify for a Traditional or a Roth IRA, this is where the SEP IRA comes into to place.

A SEP IRA is known as a Simplified Employer Pension Plan and they act very much the same as a Traditional IRA except that the contributions to it are greatly enhanced.

Many business are a one-person show, plumbers, landscapers, painters, service type fields etc..

Since regular IRAs can only be set up if the person has earned income the SEP IRA is a financial vehicle where small business owners can make contributions toward their retirement.

This is how they work -

The Sep IRA can be set up at practically any bank, Mutual Fund Company or brokerage firm and there are many that have low or no annual fees. Depending on how your small business is set up determines how much you can contribute each year.

If you are a sole proprietorship, unincorporated with no employees you can contribute 0 to 20% of your net income each year. Net income is defined as or calculated by taking your gross self employment income then subtract business expenses, subtract also ½ of the self employment tax. Then your contribution can be made anywhere from 0 to 20% of that figure up to the IRA contribution limit. For the years 2010 and 2011 the maximum amount that you could contribute was $49,000 a year.

The contribution is also 100% tax deductible. You just file your 1040, schedule C form for your business grosses and expenses, and then deduct what you contributed to your SEP IRA. This is an incredible tax incentive for the small business owner.

If your small business is incorporated as a Subchapter S or C, partnership, LLC or such, you must then draw a W-2 type of income from the corporation, then file a personal income tax form in which you still then can deduct your IRA contribution. The corporation will be taxed separately without the IRA tax deduction.

If your small business grows where you need to hire a few employees, you are still allowed to have a SEP IRA but you will need to include your employees also.

Basic rules for your employees -

They must be 21 or older and have worked for you 3 out of the last five years and have earned at least a minimum of $450.00 compensation for the year.

You also must file IRS form 5305 that set the eligibility requirements, such as length of employment, age and such. Each employee needs to have their own separate SEP IRA account and whatever percentage of contribution that you set up for yourself must also be given to your employees.

Both your own contribution and the ones made to your employees account are 100% tax deductible for your business. However the employee cannot contribute to the SEP IRA or take a tax deduction for it.

However you can see how the SEP IRA can be a great retirement account for yourself as well as a tax deduction for your business as well as establishing some loyalty with your employees by offering this IRA as an incentive to work for you.

Small businesses, the backbone of America.


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Casey Trillbar is the editor of YourRothIRAGuide.com, which is a website
aimed at supplying articles, information and resources to people
considering the use of a Roth IRA Agreement for their retirement.

http://www.YourRothIRAGuide.com