The SEP IRA (Simplified Employee Pension) has been around for many years, but has become less popular over time with child care providers. Here are its main components:
Eligiblity: There are no income eligibility requirements for a SEP IRA. Any self-employed child care provider may set up one. You must show a profit for your business in the year you make a contribution.
Contribution limits: You may contribute up to 18.58% of your business profit to a SEP IRA for yourself each year. For example, if your profit were $10,000, your maximum contribution would be $1,858.
Deadlines: You can set up and contribute to a SEP IRA up to April 15 for the previous tax year, or up to October 15 if you file a tax extension.
Tax deductability: Contributions to a SEP IRA are tax deductible. When you withdraw money after age 59 1/2, you will owe income tax on both your contributions and your earnings on your investment.
Employees: If you set up a SEP IRA for yourself and hire employees, you may have to make a retirement contribution to your employees’ SEP IRA. This will be required if your employee is at least age 21; has worked for you in three of the past five years; and has earned at least $500 in the current year.
Because of the potential of having to make retirement contributions to an employee, many providers choose a different IRA plan than the SEP IRA. The SIMPLE IRA also has rules that may require contributions to an employee’s IRA, although the rules are different than a SEP IRA.
SEP IRA vs. SIMPLE IRA
Comparing these two IRA options, the SIMPLE IRA comes out ahead. On a $20,000 profit, you could contribute up to $12,500 to a SIMPLE IRA, but only $3,716 to a SEP IRA. Since they are both tax deductible, and both have similar rules about potential contributions to an employee’s IRA, it makes more sense to set up a SIMPLE IRA. The one drawback to a SIMPLE IRA is that it must be set up at least 90 days before the end of the year.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://www.entrepreneur.com/article/371020
I’ve written much more about IRAs in my book: Family Child Care Money Management and Retirement Guide.
