For decades, the 401(k) was synonymous with retirement and employer-offered benefits.
However, for some small businesses, the 401(k) may be associated with high administrative costs, limited control and plan variety, and hard-to-find professional management.
These limitations are not new. In an effort to address them, the Solo 401(k) was introduced. Still, signing up for this vehicle can be an arduous task. The IRS instruction for determining your personalized contribution limit reads: “You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself….” And then lists a series of calculations and IRS approved forms you must complete to set up your own 401(k).
Fortunately, more accessible retirement plans for small businesses do exist. The Simplified Employee Pension Individual Retirement Arrangement, or the SEP IRA, which was introduced with the passage of the United States Revenue Act of 1978, is a variation of the more-commonly known Traditional Individual Retirement Account, or IRA.
The SEP IRA is well suited for small business owners or high earning independent contractors, who want a retirement-savings vehicle for themselves and/or their employees.
The SEP uses 25% as a contribution cap, a limitation which contrasts sharply with the numerous caps associated with 401(k) plans, including capping contributions by those over the age of 50. This means if you net more than $100,000 you may be able to contribute more to the SEP than the 401(k), providing more flexibility, more individual control, and, importantly, more saving.
The flexibility of the SEP IRA also makes it highly compatible with new technology that delivers at-your-fingertips availability to independent contractors as well as small businesses and their employees for setup purposes and ongoing maintenance, according to William Hurley, the CEO and founder of Honest Dollar.
“New accounts can be set up in seconds with the platforms that are available today,” said Hurley. “The SEP IRA may become the preferred choice for independent contractors as well as small businesses and their employees.”
Honest Dollar, LLC does not provide legal or tax advice.
Paragraph 3 IRS Instruction: https://www.irs.gov/retirement-plans/one-participant-401k-plans
Paragraph 7: Contributions are limited up to the smaller of 25% of net earnings from self-employment or $53,000 (2015 and 2016) https://www.irs.gov/retirement-plans/how-much-can-i-contribute-to-my-self-employed-sep-plan-if-i-participate-in-my-employers-simple-ira-plan