The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in California is representative of a common inquiry regarding establishing a retirement plan for a business. The advisor asked:
“Is it too late to set up a retirement plan for a business that operates on a calendar year and take a 2012 tax deduction for contributions?
Highlights of Discussion
• Believe it or not, it is not too late. Any business, including a sole proprietorship, S or C corporation, partnership, nonprofit organization or governmental entity could set up and fund a simplified employee pension (SEP) plan by its 2012 tax filing deadline, including extensions, and take a deduction for contributions made.
• Even an individual who may already participate in a workplace retirement plan as an employee may be able to maintain a SEP plan based on his or her own self-employment earnings.
• A SEP plan is an IRA-based plan that allows sponsoring businesses to make contributions to traditional IRAs established for each eligible employee.
• Businesses that contribute to SEP plans may receive a tax deduction for contributions up to 25% of eligible payroll (i.e., the total compensation of all eligible participants in the plan).
• The per-participant contribution limit is either the lesser of either (1) 25% of compensation, or (2) $50,000 for 2012.
• The IRS makes available a SEP plan employer-level document free of charge on its website, irs.gov: Form 5305-SEP, Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement. Alternatively, service providers may also have prototype or individually designed SEP plan documents available for purchase.
Conclusion
Although 2012 has come to an end, and the tax filing season has begun, don’t let clients and their tax and/or legal advisors overlook SEP plans as a last minute way to potentially maximize retirement savings and tax deductions for 2012.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.
