I talked a lot about a SEPP or SEP-IRA in my first post. I also posted a poll and asked how many folks took advantage of a SEP-IRA, and even if they knew what one was. To date, 2 people said that they didn't know what a SEP was, 2 people said that the didn't contribute to a SEP, 1 person said they contributed a little and 1 person contributed the maximum amount allowed. Since the one person who contributed the maximum amount was me, that means that the majority of everyone else who responded are unaware of the benefits of a SEP-IRA.
OK. So what is a SEP? Without exaggerating brothers and sisters, it's your best friend. Well, only if you like keeping the money you earn that is.
"An S or C corporation, an incorporated partnership or a LLC electing to be taxed as a corporation (i.e. the agencies we work for) pays the business owner (that's you Sparky!) a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner's W-2 salary up to the SEP IRA contribution limit. SEP IRA contributions are generally 100% tax deductible as a business expense."
At the end of the year AFTER your accountant (please tell me you have an accountant!) calculates your business deductions, and how much you have paid into your quarterly taxes, you are left with your net profit (pre-tax earnings). You now have to pay Federal and State income tax on this amount. Or do you? Not if you contribute to an IRA.
If you have a regular IRA you are limited to a maximum contribution of $5,000 (for 2008 - the same amount as a Roth IRA). With a SEP you can contribute up to 25% of your pre-tax earnings.
Kind of a no-brainer here kids. Obviously being able to contribute up to 25% of your pre-tax earnings is far more advantageous than being limited to $5,000. Bottom line: a SEP-IRA can save you hundreds, if not thousands of dollars in annual taxes as well as providing you with substantial retirement nest egg. And with the uncertainty of the future of Social Security, your retirement should be a very real concern.
As stated previously, SEP-IRA contributions are based on income earned via W-2s, not 1099s. With income earned from 1099s you are limited to Roth and regular IRA contributions.
You can find more info on SEP-IRAs here:
wikipedia SEP-IRA
SEPIRA.com
wikipedia ROTH 401K
Yup, I've been taking full advantage of SEP-IRAs for the past 4-5 years. It really brings down taxable income.
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