There’s Still Time to Set Up a SEP for 2016

For 2016, the maximum contribution to a SEP account is $53,000. For 2017, the maximum contribution is $54,000. However, there’s no requirement to contribute anything for a particular year. So when cash is tight, a small amount can be contributed or nothing at all.

As with most other tax-advantaged retirement plans, assets in a SEP can grow tax-deferred, with no tax liability until withdrawals are made. Early withdrawals (before age 59½) are generally subject to a 10% penalty, in addition to income tax. Certain minimum distributions are generally required beginning after age 70½.

Setting Up Your Plan

A SEP is fairly simple to set up, especially for a one-person business. Your financial advisors can help you complete the required paperwork in just a few minutes. A key benefit of SEPs is that you can establish your plan as late as the extended due date of the return for the year in which you claim a deduction for your initial SEP contribution.

For example, say your business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes. If you establish a SEP and make your initial SEP contribution by April 18, 2017 — the deadline for filing your 2016 federal income tax return — you can deduct the contribution on your 2016 tax return.

Important note: If you extend your 2016 return, you have until October 16, 2017, to set up the plan and make a deductible 2016 contribution.

Beware of Requirements to Cover Employees

Establishing a SEP is more complicated if your business has employees. Specifically, contributions may be required for any employee who:

1. Is age 21 or older,
2. Has worked for your business during at least three of the past five years, and
3. Receives at least $600 of compensation.

Your business can deduct any contributions made for employees. Because SEP contributions made for employees vest immediately, a covered employee can leave your company at any time without losing any of his or her SEP money. For this reason, SEPs generally aren’t preferred by businesses with more than a few trusted employees.

Need Help?

SEPs can be a smart way for many small businesses to save tax. You still have time to retroactively set up a SEP for the 2016 tax year and make a contribution that can be deducted on your 2016 return. If you have questions or want more information about SEPs and other small-business retirement plan options, contact Deb Weber at Kirsch CPA Group at (513) 858-6040 and we will help you get set up.