Small Business Retirement Planning

How to Set Up a Small Business SEP IRA Plan

A SEP IRA can be an effective retirement planning benefit for small business employers. Here's how to set up a small business SEP IRA plan in your company.

If you're a small business owner, you have a lot on your plate.

In addition to managing your company and maximizing its revenue streams, you need to be concerned about employee satisfaction. Retention rates matter in small business and you can't afford to risk the possibility of high turnover, especially after you've invested time and energy (and cash) in your workforce.

Small business employees partly base their career decisions on the benefits they receive from the company. That's usually bad news for small business owners who lack the ability to provide Cadillac benefits packages. SEP IRAs, however, give small business owners an attractive retirement benefit option that can improve worker retention and help them save for their retirement years.

There are many reasons why SEPs are popular with business owners. They're inexpensive to initiate, easy to manage, and flexible enough to accommodate the kinds of revenue fluctuations that happen all the time in small business. Since SEPs have high contribution limits and flexibility, they are extremely popular for sole proprietors who don't have any employees.

How to Set-up A SEP IRA Plan

The first step in setting up a SEP IRA is to determine whether or not it is the right retirement savings vehicle for your business. SEPs are great ways for business owners to contribute flexible amounts to their own retirement. But in years that you contribute to your SEP, you will also need to make contributions for all qualified employees. Since salary deduction employee contributions are prohibited, you could be on the hook for a significant chunk of change every time you invest in your personal IRA.

Next, you will need to select a financial institution to receive and manage your SEP. Qualified financial institutions include banks, mutual funds, insurance companies, and other organizations that have been approved to manage SEPs by the IRS. The institution you select will become a trustee of the plan and will be responsible for both investing contributions and providing SEP IRA owners with reports about their accounts.

At some point, you will also need to complete Form 5305-SEP, the formative document for your plan. This document does not get filed with the IRS, but it is necessary to provide the framework of the plan. This information needs to be distributed to your employees along with a written statement detailing the fine points of the plan.

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