So Many Investment Vehicles, So Many Choices
Transcript:
Katie Nealis:
What is a SEP IRA?
Easan Arulanantham:
Basically, a SEP account is a simplified employee pension. And so essentially any business can set this up. It’s the idea was the IRS want to give smaller businesses an easy way to set up a retirement plan for their employees. And so essentially it would be 25% of employees compensation, or $58,000, for 2021, up to a cap, essentially, a business can contribute to this plan.
Tom Vaughan:
And so, let’s just a couple scenarios that I think are kind of interesting here. So if I am a sole proprietorship i will i have a you know, let’s say I’m, I’m an author, I write books, and I have a business for that. I don’t have any employees, you know, the only people that work for me are on some kind of contract or what have you. That means I can just use this as a really kind of a supersaver program just for myself, correct. I mean, they don’t have any employees that have to put money in for.
Easan Arulanantham:
Yeah, so essentially, you could just make sure that your whatever, it’s only set by the business can contribute. So you can essentially set it so that you always hit the max for that, that each year. And so people that set up SOPs and are aggressive with it can save a bunch of money, so much faster than just, you know, from General 401k. Because for a 401k, you can really defer up to a much less money 20. I think it’s $20,000 or $19,500.
Tom Vaughan:
Yeah, exactly what the catchups and such you can get to I think $26,500. But that’s a lot less than $58,000. That’s a huge differential in terms of somebody really trying to put money away into retirement plans. So now, if I have employees, if I put away 10% is basically 10%. for everybody. Is that right? Kind of across the board?
Easan Arulanantham:
Yeah. So you’d have to go for equal contributions. And so when it comes to setting up these benefit plans, there are ways that you can set it up to make sure that you want the money to go to the right spot, but there’s a lot of variations you have to do. And so with a SEP, it’s always equal but with other programs you can set up so maybe someone that’s only been there five years, has a certain amount of percentage. That goes that’s matched, essentially, while you because you’ve been there for 20 years, you get a way bigger match.
Tom Vaughan:
So you can set up some criteria for who gets it and, and who doesn’t, or how much they get and what have you. Okay, that’s pretty useful.
Easan Arulanantham:
Yeah, so there’s a lot of creative things you can do. But which plan you set for your small business differs based on your kind of wants.
Tom Vaughan:
Yeah, that’s awesome. Yeah, there’s one of the things to get good at, you know, if you’re trying to really be proficient in your knowledge base is all of these different types of programs, you know, 401k’s 457s, 403b’s, IRAs, you know, of all types of Sep IRAs, there’s simple 401, K’s, there’s Roth IRAs, all of these things, there’s a bunch of these and it gets confusing. But just trying to, you know, consult with somebody and make sure that you’re using, you know, the right ones. If you’re putting money away, you know, if you can’t save, that’s one thing, but if you are saving, you know, where’s the best place, where’s the best place to put that money, sometimes it’s not even a retirement plan. It’s just a regular account, a joint account or trust account, and those types of things could be the right situation. It does depend on you know, your overall scenario, but, but making sure that you’re putting the money in the right places, I mean, it’s not that easy to say most people don’t. So if you’re one of those people that is figure out the best place to put it and I think that is one of the key pieces, you know, that we help with also because it’s custom, your you know, Shin Eric, information about where to put your money may not be right for you, because your situation is maybe different than what they’re talking about, on average. So you know, when you want to retire and all of these things factor in. And so SEP IRA is a really, really good tool, and it’s something to put into the basket of things to think about if you’re in the right situation.