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?
Congrats on starting your own LLC, and kudos for saving for retirement. The great news is you can potentially put away 25% of your income into a SEP IRA.
If you are ambitious, you can contribute $53,000 in 2016. There are no catch–up contributions allowed with SEP-IRA regardless of age. However, you may still be able to contribute to a Traditional IRA or a ROTH IRA depending on your income.
Consult your tax professional for more specifics and to help calculate your actual maximum contribution.
All the best,
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA, SIPC, a Registered Investment Advisor. Trilogy Capital Trilogy Financial and NPC are separate and unrelated entities. The opinions voiced in this article are for general information only and do not constitute an endorsement by NPC. NPC does not provide tax advice. FinancialPlannerLA.com
If you have your own company, whether you are an LLC or even a sole proprietor (if the LLC doesn't file a tax return and you report your income on Schedule C of your personal tax return/1040, you can most likely open and fund a SEP IRA.
A SEP IRA is an employer plan that you will fund with COMPANY money in contrast to a 401k or IRA/Roth IRA that you fund personally. You are able to fund up to 20% of your company earnings (a little over simplified in this paragraph...I'll explain more below). So if your company makes $100,000, you can defer $20,000. Typically to max out a SEP IRA, you must make more money. Again, only employer contributions are allowed. The maximum contribution cannot exceed the lesser of 25% of total compensation (or company earnings if you are the only employee) of either: $53,000 for 2016, or $54,000 for 2017. Compensation up to $270,000 in 2017 of an employee's compensation or Company earnings may be considered. If you are the owner, you are limited to 20% vs. the 25% for employees.
So for high income sole-members, a SEP IRA is a great way to go. If you are making less, other options may be better. Bottom line, as a small business owner, you have several options to save for retirement. Here is a summarized "quick list" - click on the links to investigate more:
If you have Lower income, consider (under $150k to $200k):
- Just funding a traditional IRA or a Roth IRA (best for you?)
- Solo 401k
- SIMPLE IRA or SIMPLE 401k (similar to the IRA, but with loans)
If you are moderate to higher earner (over $200k):
- SEP IRA
- Traditional 401k Plan (with profit sharing and match)
- Cash Balance or Defined Benefit Pension Plan.
Each type of plan has its pros and cons. There are basically 6 types to consider that are also summarized in this article.
These ares and plan choices can be very complex to make sure that you know the rules and know which is best for you. Read the information above and then check with your CPA and Financial Advisors.
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.
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.