While clients who own businesses may be focused on day-to-day business activity, they may not be planning for retirement.
In fact, the Small Business Administration reported in 2012 that more than 9 million self-employed individuals lacked retirement plan coverage, and that only 19.5% of workers in firms with less than 100 employees participated in a retirement plan.
One of the most common savings vehicles for self-employed individuals and small business owners is a Simplified Employee Pension, SEP IRA. The April 15th deadline for contributions leaves time to establish and fund a SEP IRA for the 2012 tax year.
It is an opportune time to contact sole proprietors and small business owners to discuss the benefits of funding a SEP IRA including the following:
1. Reduce the tax bite with deductible contributions
Investors may take a federal deduction equal to the amount of their employer contributions, up to a maximum of 25% of compensation paid during the year (or 20% of net earnings after expenses if the investor is self-employed.) Plans meeting certain requirements may qualify for a $500 start-up tax credit.
2. Maximize saving through contribution limits
There is a contribution limit of $50,000 or 25% of compensation for 2012, whichever is less ($51,000 for 2013). Self-employed individuals can contribute up to 20% of compensation.
3. Take advantage of flexible funding
Employers can decide every year what amount to contribute, which can vary, or to skip contributing altogether.
4. Benefit from tax-deferred compounding
All of the money contributed to a SEP IRA, as well as any dividends and/or capital gains on those holdings, grows tax deferred.
Improved outlook for retirement through tax-deferred growth of account assets*
5. Provide a win-win opportunity for you and your employees
A SEP IRA allows you to prepare for your financial future and to help your employees prepare for retirement.
Sole proprietors made up the majority of the nearly 28 million small businesses in 2010, the SBA found. Considering this segment of the business community, financial advisors have an opportunity to expand their client base by focusing on small business retirement planning needs. For more information on the benefits of a SEP IRA, download our Putnam SEP IRA fact sheet.
*Before-tax and after–tax saving assumes a hypothetical investment of $250 a month, with annual returns of 8% compounded monthly and earnings reinvested. The before–tax illustration does not reflect the effect of taxes, which are due upon withdrawal. The after-tax illustration reflects the effects of an annual 25% federal tax. The value of the tax–deferred account upon withdrawal will depend on the investor’s tax rate. Depending on an investor’s tax rate, the value of the taxable account upon withdrawal may be higher or lower than what is shown. Lower minimum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the
accounts shown. Investors should consider their personal investment horizons and income tax brackets, both current and anticipated, when making an investment decision; these may further affect the results of the comparison. The return is shown for illustrative purposes only and is not intended to predict the return of any investment in your plan, which will fluctuate. Regular investing does not ensure a profit or protect against loss in declining markets. Withdrawals are subject to income tax, and those made before age 591/2 may be subject to an additional 10% tax.