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SEP IRAs explained in detail in this episode of the show. Join Ralph Estep, Jr., as he shows the huge tax savings of using a SEP IRA to find your retirement.
Understanding SEP IRAs: Saving on Taxes and Planning for Retirement
In this episode of 'Ask Ralph', we delve into Simplified Employee Pension Individual Retirement Account (SEP IRA), a retirement savings tool primarily suitable for small business owners or independent contractors without employees. SEP IRAS explained in detail
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EP 46 - SEP IRA's Explained
[00:00:00] welcome to the ask
Ralph show. We're so happy you joined us today. If you want to find out more information about the show, you can go to our website. That's easy to find it's at ask Ralph podcast.com. So today we're going to talk about SEP IRAs. Now you might be asking yourself what in the world is a SEP IRA, but let me start with a story.
So the other day I met with a new client. This client had started a new contracting business. He had been working for somebody else for many years and he decided to branch out on his own. So [00:01:00] he went and set up an LLC and did all those things to get it set up and running. And any came in to me last week for a consultation because we were doing his taxes for 2023. And I said to him, his name was Ron.
And I said, Ron, I said, I see you've got all your books in order. You've got your, profit and loss statement altogether. We're ready to do the tax return. I said, but I got a question for you. Did you think about putting any money into retirement last year? And he said, you know what, Ralph, it's funny, you brought that up. When I was working for somebody else, I had the ability to contribute to a 401k plan. But when I started my own business, I had no idea what I was going to do. So today we're going to talk about how Ron. Could have created a SEP IRA. And saved a bunch of money on taxes and also put money away for retirement.
So let's start by talking about what exactly is a SEP IRA. It's really pretty simple. And that's kind of what it stands for. A SEP IRAs, a simplified employee pension, individual retirement account. [00:02:00] This is simply an IRA supersized. That's the best way to explain it. And what it allows is small business owners. And people who maybe work in the gig economy or independent contractors to create. A pension plan for themself. Now they could also do it if they have a small business, but. Let's talk about how it works, because that's kind of the key to this.
So in Ron's case, Ron set up this new. Contracting business. And he doesn't have any employees. He's just working for himself. he's doing kitchen remodeling as a matter of fact, So Ron, goes out and works every day. He makes money, all that sort of thing. But what he's not able to do because he didn't have this set up, was putting money away for retirement. So let's talk about how the SEP IRA plan works.
And it's really simple to set up, you work with. A broker now I don't do these personally, but if you want it to go to our website, we're going to have some referrals out there for people you can talk to about setting these up. And they create a simple plan. So the [00:03:00] business, Ron's business in this case, I apologize.
I don't remember the name. But, it's just called Ron's contracting business for, for now. Would go to a broker and he sets up this SEP plan and it's really simple. And the way that it works is now Ryan can make contributions to this SEP plan. Now. The contributions come from the business. And here's the best part.
He can put up to, and every year there's a new, a maximum amount that you can put in. He could put up to 25%. Of. The income that the business showed. In 2023. With a max remember . This is for 2023 of $66,000. So, what am I really saying here?
So let's say Ron had a profit of a hundred thousand dollars.
Absent a retirement plan. Ron's going to pay. Tax on that a hundred thousand dollars. There's no way to sheltering that. But if he's able to set up the SEP plan. [00:04:00] Ron could actually put $25,000 away for retirement. Now you might ask, Ralph, how did you come up with 25,000? It's really not that complicated folks. I said he had a hundred thousand dollars worth of income. And the maximum contribution is 25% or that top floor, like I talked about 66,000.
So in his case he had a hundred thousand dollars in income. And he could put 25,000 away now. Might ask ourselves, what's the value of that? But what that does is that takes that business income from a hundred thousand dollars down to $75,000, because it comes right off the top. So effectively with Ron being, A small contractor. He's in a pass through entity.
And we talked about that on another episode. We just saved. A ton of tax. Let me tell you about what that really looks like. So he reduces income by $25,000. If we assume that Ron is in the, let's just say for sake of argument, the 12% tax bracket. and let's say. He lives in Delaware too, and he works in Delaware.
So we're going to [00:05:00] give him a 8% Delaware tax bracket. So 20%. So he put 25,000 into this SEP IRA. And if you take 20% of that, that means he just saved $5,000 in tax. That's a huge number folks. That's huge. I mean, think about that. He was able to put $25,000 into this retirement plan. And effectively it only cost him. 20,000. So that's the beauty of these things.
So that there's a huge tax advantage. Now let's talk about.
what you need to do to be eligible for this. We obviously have to create the plan. So you're going to have to meet with a financial broker or something like that and, and create this plan. You gotta be 21 years old. And you have to make at least $600 during the year. And we talked about the limit.
you have a 25% of income limit. And with that cap of 66,000. So in Ron's case, he had a hundred thousand dollars worth of income he capped out at, at 25%, which is [00:06:00] 25,000. But let's say he had $300,000 worth the income. Multiply that by 25% now you're at 75,000, but then it's where the cap would fit. it hit you, so you wouldn't be able to put the whole 75 and, but you could do 66.
And so this did two things. Thing number one, it reduced his taxes in the current year. Which is beautiful. The second thing it did. It put money away for retirement. So that's a huge investment into his retirement. It's going to compound moving forward. Now there are some other things to consider. The SEP IRA is not a great plan.
If you have employees. Let me tell you why that's the case. the way that a SEP works. Is that whatever you do for yourself, you've got to do for everyone. So in Ron's case, let's say Ron decided to hire an apprentice. And this apprentice worked for him. Well, if Ron's going to maximize his contribution at 25%. He's got to do the same for his [00:07:00] employees. So it might not be what the small business owner was looking to do.
So. To be very candid with you. Most of the time for SEP IRAs, I recommend these to. People who have their own business and not have any employees. Cause there's a bunch of other things they could do. And we'll talk about those in a future podcast. They're simple IRAs. There's. Solo 401k safe Harbor 401k.
So we'll talk about those down the road. But for today's discussion, we're really talking about the SEP IRAs, but if you have employees, it's probably not going to be the best fit for you.
The big thing here is making sure you have professional advice. So, this is where I'm going to plug myself as an example. I'm an accountant.
This is what I do. I help people figure out ways to save on taxes. And improve their financial situation. So it will behoove you to sit down with somebody like myself. And go over your particular situation and see, is there a way we can make some improvements to your situation now, the best way to get in touch [00:08:00] with me? As you go to my website and it's simple to find. it's ask ralph.com. When you go to my website, there's a little button there that says schedule.
You can schedule an appointment with me. I'd be happy to sit down and talk to you about your business. We do zoom meetings, truth be told we have clients all over the world. And I can really sit down with you and give you some clear objectives and ways that you can improve. Your financial bottom line, like in Ron's case, Ron came in, he paid for a consultation.
We sat down. And I showed him where he could save $5,000. And contribute to his long-term financial future. So that's really what it comes down to.
Let's recap where we're at today with some action items. We talked about the SEP IRA. We talked about how they're created. Like I said, it's not complicated.
You go find a broker that will set this up for you need to set it up before the end of the year. And then you can contribute up to 25% or the cap. Based on the income for the year. And like I said, if you want to dig deeper into this, you can [00:09:00] contact our office again.
That's ask ralph.com. We'd be happy to sit down with you or do a zoom meeting and go over your particular situation.
So before we close out today, I want to remind everybody that. We have this website for our podcast. It's ask Ralph podcast.com. On that website, you can leave a review, you can send us a voicemail message. You can talk about things you'd like to hear us talk about in future podcast episodes. We really encourage you to do that.
And best of all, If you click on the link. for creating an email connection with us. We'll we'll sign you up for our email list. We'll also give you a discount for lack of a better way of saying it. For a consultation with me. So again, go to our website at ask Ralph. podcast.com.
Well, I really hope today was insightful for you. It's all about the financial journey folks.
It's all about how can we figure out ways to keep more of our money and plan for a more successful retirement. So I always end the show with a very simple statement. And that is stay financially [00:10:00] savvy. And may God bless you abundantly.
