I am starting a limited liability company (LLC). I will be the sole member. Can I open an SEP IRA? How much tax-deferred money would I be able to contribute each year?
Yes you can!
Currently in 2016 SEP IRA contribution limits are 25% of earned income, up to a maximum of $53,000 (IRS guidelines).
Keep in mind, only earned income that is subject to payroll tax or self employment tax can be considered to calculate your maximum contribution. Also, technically it's the business that makes contributions to the SEP IRA for the benefit of each eligible employee.
In a word, yes. A limited liability company (LLC) is eligible to establish a simplified employee pension (SEP). Keep in mind that plan contributions (including SEPs) are usually based on W-2 wages if the business is a corporation. This means that you may need to pay yourself W-2 wages in order to be eligible to receive an SEP contribution from the business. Check with your tax professional to be sure.
Contributions may be as much as 25% of your compensation, and they may not exceed $53,000 (for 2016). For unincorporated businesses such as sole proprietorships, partnerships and limited liability partnerships (LLPs), plan contributions may be up to 20% of the business owner's modified net profit. Should you decide to hire employees, they must also be covered under the plan if they meet the eligibility requirements.
Also see IRS Publication 560, available at http://www.irs.gov/pub/irs-pdf/p560.pdf.
This question was answered by Denise Appleby
Yes you can open a SEP IRA for a Limited Liability Company.
The amount you can contribute is the lesser of:
- 25% of your compensation or
- $53,000 (for 2016 and these amounts could be subject to annual cost of living adjustments for later years)
Compensation for a corporation is defined as salary listed on IRS W2 Wages and Tax statement.
You must establish a SEP on or before Dec 31st of the tax year but do not have to fund the plan until the due date of your tax return (including extensions).
You are not allowed catch up contributions to a SEP.
You do not have to contribute every year however the years you do, contributions must be made to the SEP IRA’s of all eligible employees.
An eligible employee is at least age 21 and has worked for the employer during 3 out of the last 5 years.
Part time employment counts in determining years of service.
You do not have to make contributions to an employee who earned less the $600 (subject to cost of living adjustments).
Another option is a Solo 401(k).
Yes you can open a SEP IRA, however if you are the sole owner of you and your spouse, I prefer the solo 401(k) product. It is bankruptcy remote, utilizes a separate tax ID and is considered a separate entity. There are no initial fees for the solo plan, you can use ETFs, Bonds, mutual funds, illiquid alternative assets and option in this brokerage account. The funding is in 2 parts, a salary deferral piece of $18K and then a profit sharing piece up to a total of $54k. These limits change plus there is a catch up provision if you are over 50 years of age. Feel free to go to www.qfainc.com to learn more.
Denise Appleby's answer to your question is excellent. The only clarifying question I'd ask of you is - do you plan to remain a solopreneur or do you see yourself hiring additional employees some day?
If you envision hiring additional employees, then you also may want to consider a SIMPLE IRA. Contribution limits are lower ($12,500 for 2016), but this plan is also easier to maintain and would likely be easier for you to fund as an employer if you end up having multiple employees working for you.
Denise wrote a great article on SIMPLE IRA's which you can check out here for more detail: http://www.investopedia.com/university/retirementplans/simpleira/
Good luck with the start of your LLC!
With Kind Regards,