Self-Employed Plan - SEP

WHAAA SEPPPP? Think:

Simplified
Employee
Pension Plan

It’s basically a personalized pension plan for business owners, and is a form of IRA. The company contributes some amount of money to the SEP, and they get a tax deduction. That amount of money is generally capped as a percentage of the total compensation given to the employee.

SEP is an obvious tax-deferment system for sole proprietors who can take advantage of this delay, in paying tax as a kind of way to fund their own retirement. The big catch here is that what the big boss pays herself, she has to pay to her employees…or rather, she has to contribute the same percentage to their SEP that she has of her own compensation.

When the SEP is finally distributed, often decades later, those distributions are then taxed at normal, ordinary income tax rates. So yeah, if you own a small chain of dry cleaner shops specializing in removing bloodstains from the clothing of mafia victims. Then you probably have enough money where it makes sense to set up your own SEP plan.

That way, you can defer income, and taxes on that income, to a much later date, when presumably your marginal tax rate will be lower than it is today. That is, if today you’ve earned 200 grand, and your marginal rate is 45%, then you only keep 55 cents on each dollar that you earn…or 110 grand.

But a couple decades from now, you might be retired, having already put your kids through assassins college, and now, instead of needing $163,000 a year in income, you live just fine on $50,000. So as you distribute back to yourself your SEP, which works just like an IRA, instead of paying 45% tax on that marginal dollar, you now only pay 20% tax, so you keep 80 cents on each dollar instead of only 55.

A SEP plan highly encourages people to save for old age, or retirement. The key differences between a normal IRA and a SEP? In a SEP, you, the business owner are the employer, so only you contribute money to the SEP.

Like...in normal companies, one of the big benefits the company provides is matching a dollar for a dollar for IRA contributions, so if you’re saving $5k a year into your IRA, your company would contribute an additional 5 grand into it.

So yeah, in a nutshell...that is…WHAA SEPPP...