Here’s all you need to know about SEP IRAs for the self-employed.

by | Nov 4, 2020 | IRA, IRA Contribution, Roth IRA

Here’s all you need to know about SEP IRAs for the self-employed.

A SEP IRA can be one of your best choices if you are self-employed and are looking for good retirement plans. If you are a business owner who has one or more than one employee or you have freelance income, then you can open a SEP IRA. The SEP-IRA is formally known as the “Simplified Employee Pension” Plan IRA. This pension plan contains an IRA at its core; however, helps in larger tax deductions and contributions than that of the traditional IRA.

How can you start a SEP IRA?

The major advantage of a SEP IRA is that it is very simple to set up and manage as well. Complicated paperwork is also not included in the SEP-IRA.

  1. You would have to start the process by selecting a trustee who would be able to manage your SEP-IRA plan.
  2. This trustee could be a mutual fund family, a bank, or a brokerage firm,
  3. You would have to create a written agreement which would explain the plan details and its benefits. Form 5305-SEP i.e. Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement would be provided by the IRS to simplify the procedure.

 

Working process of the SEP IRA.

 The working process of the SEP-IRA is almost similar to that of the traditional IRA. The contributions made into the SEP-IRA are tax-deductible and the money that is contributed can be easily invested into a self-directed account. The earnings accumulate in a tax-deferred manner and are withdrawn at the age of 59 and a half.

 One of the major differences between the SEP-IRA and traditional IRA is their limit of contributions and the catch-up contributions. In a traditional IRA, the contributions you are making can be limited to not more than $6000 in a year or to $7000 if your age is 50 years or more. But, in a SEP IRA, there is no provision for additional catch-up contribution if you are above the age of 50 years.

 How can contributions be made into a SEP IRA?

 It is feasible to invest in a full-service brokerage firm and trade any type of investment selected. You have the liberty to choose if you wish to hold the plan in a managed option. Moreover, contributions can be made into your SEP IRA of the previous year even until the extended tax deadlines. In this case, you have filed a request for a tax deadline extension in the year 2019; you still have to file the tax returns by the deadline of 15th October then you would still be able to make contributions into the SEP-IRA by the deadline.

 Moreover, there are no provisions for catch-up contributions in the case of Roth SEP IRA. It is advisable that if you are earning within a considerable income limit, you must make contributions to the Roth IRA and can rather set up a separate Roth IRA. Your contributions into the Roth IRA plan are good as long as they are combined with the SEP contributions and do not exceed $56,000.

 The pros and cons of SEP IRA 

Pros of SEP IRA

Cons of SEP IRA

The high limit for contribution i.e. $57,000 in 2020 and $56,000 in the year 2019

There is no feature to provide catch-up contributions if you are 50 years old or above.

This is easy to set up and manage

No features available like the Roth version i.e. the advantage of opting for payment of taxes now and taking on distributions later on during your retirement.

SEP IRA can be combined with a traditional or a Roth IRA.

If you are contributing for yourself then required proportional contributions must be made for every eligible employee

No need for commitment to contributing to the SEP-IRA even in the next year.

SEP IRAs would need minimum distributions to begin at the age of 72.

The contributions made into the SEP-IRA are tax-deductible which includes those contributions that are made into the employee accounts.

In SEP IRA, the distributions which are made before the age of 59 and half years are taxed and there is a 10% penalty if the major reason for distribution does not satisfy the exception of early withdrawal.

 

Conclusion

 So, a SEP IRA would help in providing a chance for contributing a good amount every year and will also let your savings grow in a tax-deferred manner. SEP IRA would be very much helpful if you do not have other employees and are not even planning to hire employees soon.

 

How to leverage your income tax refunds amidst the COVID-19 pandemic?

How to leverage your income tax refunds amidst the COVID-19 pandemic?

by | Jun 15, 2020 | 401(k), COVID - 19, Income Tax refunds, Roth IRA

How to leverage your income tax refunds amidst the

COVID-19 pandemic?

Currently, the entire world is facing the dreadful consequences of coronavirus. Millions and millions of people have been impacted and the global economy has come to a standstill. In the US, the impact of the pandemic COVID-19 is intensifying each day. Millions of Americans have become unemployed and the economy of the country is regressing.

In such difficult times when the livelihood of the common people has been impacted in such a worse manner, Americans see a dint of hope in the Income-tax refunds which they would obtain. Even though the Federal Government has provided Stimulus Checks, additional money is always helpful in such bad times.

If you have filed your Income Tax Returns and are waiting to receive a hefty amount from the IRS, then you should also think about avenues by which you can leverage your refunds during these critical times.

Let us have a look at some of the best options to leverage your income tax refunds during this pandemic COVID-19.

a.Emergency Savings Account

You should open a savings account and try to put a major part of your Income tax refund into that account as an Emergency Savings Account. This would be helpful in case emergencies are arising due to the pandemic such as a medical emergency or you lose your job, unfortunately. This Emergency Savings Account will be your savior in difficult times.

b.Increase your contribution into your 401(k)plan

 You can utilize this opportunity to increase your contribution to your 401(k) plan. In case, you have been contributing only 3% of your paycheck but your employer matches up to 6% then you can double the pre-tax income which you are investing in your retirement funds. It can lead to your monthly paycheck being a little low but you will be investing for good and your taxable income would also be low.

 

c.Investment into Stocks

When you have already made your contributions to your retirement account, then you must invest your income tax refunds into purchasing stocks or mutual funds. Generally, the stock market would deliver better returns than that of a Savings Account and Treasury bonds. But, sometimes there are risks involved in the stock market and the returns are not guaranteed. Investment in stocks by tax refunds is a good idea if you are saving to attain long-term goals.

d.Paying down the existing debts

 When you obtain your Income Tax returns, it is wiser to pay off your debts quickly. The high-interest debts must be paid off on priority as this would help you in saving a lot of money in the future. Usually,debts are associated with credit card dues and if you are fortunate enough to not have credit card dues then you should pay off your car loan or student loan.

 

e.Contribute to Regular or Roth IRA 

 If you are thinking about your long term savings, you must contribute your income tax refund into Regular or Roth IRA. If you and your spouse have a modified AGI of less than $203,000 then you can be able to contribute up to $6000 to Roth IRA in 2019 or $6500 if you are 50 years or above. 

 

f.Contribute to HSA

 You can open HSA if you do not have one as HSAs are a very good option to keep aside some money for medical expenses i.e. may be routine or emergency medical expenses. Your unused funds in the HSA keep on rolling to the consecutive years and the remaining money can be utilized during retirement once you are above 65 years of age.

g.Investment into an ETF

You can invest your income tax refunds in broadly diversified ETFs which are a safe investment option. ETFs would include thousands of stocks, low volatility, and any risk compared to individual stocks. Investing in ETFs would be good as they are passive and have a low expense ratio.

h.Make donations

This is a philanthropic option and perhaps one of the best ways to utilize your money obtained by a tax refund. You can make your donations into mainly those charitable organizations which support a good cause and are working towards a cause that you support.

In addition to all these available tax refund investment options, you must some a considerable amount of cash in your hand during these emergency times. Moreover, you can invest some of your money in self-care avenues like taking up any online courses/training or workshop. This would be helpful in your career in the future and would return you an incremented paycheck 

 

References

  1. https://www.mint.com/saving-money-2/10-smart-ways-to-use-your-tax-refund
  2. https://www.moneytalksnews.com/7-ways-to-make-your-tax-refund-worth-more/
  3. https://www.thestreet.com/investing/smart-ways-invest-tax-refund
  4. https://www.cnbc.com/2020/02/14/how-to-use-2020-income-tax-refund-check-from-irs-to-spend-and-save.html
  5. https://turbotax.intuit.com/tax-tips/tax-refund/7-smart-ways-to-invest-your-tax-refund/L32cGdWtg
  6. https://www.bankrate.com/taxes/ways-to-invest-tax-refund/
  7. https://www.thebalance.com/smart-tax-refund-investments-4134434