Saving for retirement as a business owner can be complicated and expensive, but it doesn’t always have to be. If you are a business owner, there are a few different retirement accounts available that can be simple to establish–especially for those who do not have employees. For those who own a small business without any employees, a SEP IRA is the easiest way to lower your tax liability for the current year and defer your future income. 

A SEP IRA, or simple employee pension plan, is a traditional IRA designed for simple businesses with higher contribution limits. Like a traditional IRA, every dollar you contribute to the account is an above-the-line deduction for AGI. Meaning, whatever you contribute to the account lowers your income dollar-for-dollar. Also, the same distribution rules apply to the SEP IRA that apply to the traditional IRA. The SEP IRA has some advantages over the traditional IRA. 

The SEP IRA’s contribution limits are the lesser of $57,000 (2020) or 25% of the net earnings after considering the deductible portion of a person’s self-employment tax and the deduction for contributions on behalf of the owner’s plan. These higher contribution limits give the SEP IRA owner the ability to eliminate more significant tax liabilities than the traditional IRA, saving more towards retirement. 

Another benefit to the SEP IRA is the ability to delay contributing to the account until the business owner files their tax return. A business owner can postpone filing their return until the October filing deadline to make the SEP IRA contribution for the previous tax year. For example, if a business owner does their taxes in March and finds out they owe money to the feds and state, their preparer can calculate how much of a SEP IRA contribution they need to make to eliminate some or all of their tax liability. 

The business owner can file an extension in April and pay what they owe. Then, they can save until the October filing deadline to make their SEP IRA contribution for the previous year and complete their return. This extension means that a business owner can use their current year’s income to lower the previous year’s tax liability. By making the SEP IRA contribution, the business owner has lowered their income and tax liability. If payment were made when the tax extension was filed in April, some or all of the payment would be refunded. 

The SEP IRA is a simple and easy way for business owners to save for retirement and significantly lower their tax liability. It has larger contribution limits than the traditional IRA and offers more flexibility when contributions are made. If you own a business and are interested in simultaneously lowering your tax liability and savings for retirement, please contact one of our advisors. 

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The Twin Rivers team wants to guide you on your journey to financial success. If you have any questions about the topics above or would like to discuss any financial decision you are facing, please do not hesitate to contact our team.