Steven Thomas is a small business owner with 8 employees. He wants to setup a retirement plan for himself and something for his employees. He is looking for an easy and low-cost Retirement plan. A plan that can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A plan with advantages like tax deductable contributions, he decides each year whether, and how much, to contribute to his employees’, eligibility for a tax credit, and low costs administrative fees.
Steven was trying to set everything up before the end of his fiscal year, and now it’s December 31 and he filed for the automatic 6-month extension, moreover he still needs to find an insurance companies that issue annuity contracts. Steven decides to Google it and finds www.Taxsavingexperts.com and contacts one of their independent insurance agents (independent agent are not hand cuffed to selling for one company; this gives the agent the freedom to find what is right for you).
Steven decides with his agents’ advice to establish a SEP for its employees. Steven’s industry is cyclical in nature, with good times and down times. In good years, Steven can make larger contributions for its employees, and in down times it can reduce the amount. Steven’s agent informed him that under a SEP, the contribution rate (whether large or small) must be uniform for all employees. His agent picked a financial institution that offers several investment funds for the employees to choose from. Individual employees have the opportunity to divide their employer’s contributions to their SEP-IRAs among the funds made available to Steven’s employees.
Simplified Employee Pension plans (SEPs)
SEPs can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. Under a SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all employees (including the employer). A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.
Advantages of a SEP
• Contributions to a SEP are tax deductible and your business pays no taxes on the earnings on the investments.
• You are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs.
• Generally, you do not have to file any documents with the government.
• Sole proprietors, partnerships, and corporations, including S corporations, can set up SEPs.
• You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting the plan.
• Administrative costs are low.
ESTABLISHING THE PLAN
1. Contact one of our independent agents, and choose the IRS model SEP, Form 5305-SEP, Simplified Employee Pension –Individual Retirement Accounts Contribution Agreement, or another plan document offered by the financial institution. Regardless of the SEP document you choose, when filled in, it will include the name of the employer, the requirements for employee participation, the signature of a responsible official, and a written allocation formula for the employer’s contribution.
A SEP may be established as late as the due date (including extensions) of the company’s income tax return for the year you want to establish the plan. For example, if your business’s fiscal year (a corporate entity) ends on December 31 and you filed for the automatic 6-month extension, the company’s tax return for the year ending December 31, 2004, would be due on September 15, 2005, allowing you to make the initial SEP contribution no later than September 15, 2005.
Choosing a financial institution for your SEP is one of the most important decisions you will make, since that entity becomes a trustee to the plan. (Tax Saving Experts is not a financial institution; we are independent insurances agents. We offer our assistance to find the best institution at the lowest cost for you)
Trustees work closely with employers and agree to:
• Receive and invest contributions, and
• Provide each participant with a notice of employer contributions made each year and the value of his/her SEP-IRA at the end of the year. Trustees of SEP-IRAs are generally banks, mutual funds, insurance companies that issue annuity contracts, and certain other financial institutions that have been approved by the IRS.
2. With the help of your agent complete and sign Form 5305-SEP (or other plan document, if not using the IRS model form). When it is completed and signed, this form becomes the plan’s basic legal document, describing your employees’ rights and benefits. Do not send it to the IRS; instead, use it as a reference since it sets out the plan’s terms (e.g., eligible employees, compensation, and employer contributions).
3. Give your employees a copy of the Form 5305-SEP (or other plan document, if not using the IRS model form) and its instructions, along with certain information about SEP-IRAs (described in Employee Communications below). The model SEP is not considered adopted until each employee is provided with a written statement explaining that:
• A SEP-IRA may provide different rates of return and contain different terms than other IRAs the employee may have;
• The administrator of the SEP will provide a copy of any amendment within 30 days of the effective date, along with a written explanation of its effects; and
• Participating employees will receive a written report of employer contributions made to SEPIRAs by January 31 of the following year.
OPERATING THE PLAN
Once in place, a SEP is simple to operate. Your trustee will take care of depositing the contributions, investments, annual statements, and any required filings with the IRS.
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Information obtained from http://www.irs.gov/pub/irs-pdf/p4333.pdf