Own a Business? Consider a SEP IRA For 2013

Tuesday, March 11, 2014

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

If you own a business and currently don’t have a company retirement plan, consider opening a SEP (Simplified Employee Pension) for 2013 (that’s not a misprint in dates). A SEP is a relatively uncomplicated employer retirement plan that uses an IRA as its funding vehicle. It can allow you to put away a sizable amount of money towards your retirement and get a tax deduction too.

You have until your business’ tax-filing deadline, plus extensions to set up and fund a SEP for 2013. For example, if your business is not incorporated, your tax-filing deadline for 2013 is April 15, 2014. But if you have a tax-filing extension until October 15, 2014, you can set up and make a SEP contribution for 2013 up until that time.

The maximum SEP contribution for 2013 is 25% of your compensation or $51,000, whichever is smaller. The definition of compensation varies depending on whether your business is incorporated or unincorporated. Only the first $255,000 of compensation is considered for 2013. If you have employees, you generally have to make a SEP contribution for them as well, unless they can be excluded under the terms of the SEP agreement. Check the SEP agreement to see which employees can potentially be excluded from participating for 2013.

If your business is not incorporated, then your compensation for purposes of figuring out how much you can contribute is based on the profit of your business. That profit is then adjusted for certain items, such as self-employment tax. It’s best that a CPA or professional tax preparer do this calculation for you.

If your business is incorporated, then your compensation is your W-2 wages if your business is a C corporation. If your business is an S corporation, your compensation is also your W-2 wages; however any profit from the S corporation that is passed through and taxed to you does not qualify as compensation.

So, when you’re having your taxes prepared for 2013 and you’re a business owner, ask you tax preparer about setting up a SEP for last year.
 

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