SEP IRAs provide source of retirement funds for self-employed

Betty J. Neal is a certified financial planner and investment representative for Edward Jones Investments.

If you're self-employed, and you've already established a Simplified Employee Pension Individual Retirement Account, you've still got until April 15 to fully fund the plan for the 2002 tax year. If you haven't set up an SEP IRA, consider opening one because it can help build significant resources for retirement.

If you don't have an SEP IRA yet, you can still establish and fund one for 2002, as long as it's done by the tax-filing deadline. This will likely be April 15, but some businesses could have a different deadline.

An SEP IRA offers some key advantages. First, of course, are the tax benefits. Contributions are tax deductible and earnings grow tax deferred, which means earnings can grow much faster than it would if placed in an account that had to pay yearly taxes.

Furthermore, the SEP IRA's relatively high contribution limits allow individuals to put away sizable sums every year. For 2003, a person can put in the lesser of $40,000 or 25 percent of eligible compensation, which is capped at $200,000.

Obviously, an SEP IRA can be a great vehicle for building individual retirement savings. But small-business owners may find that an SEP IRA is a good tool for attracting and retaining good employees.

IRS regulations require businesses to include all eligible employees who are at least 21 and have been with the company for three of the preceding five years. But, once the plan is set up, businesses have a great deal of flexibility in making contributions to employees' accounts.

Consequently, businesses can change annual contributions or cut them altogether, according to the performance of the business. Keep in mind, though, that the percentage of compensation contributed to an SEP IRA must be the same for owners and employees. So, for example, if an owner puts in 25 percent of his compensation to the SEP IRA, the owner also must contribute 25 percent of all eligible employees' compensation to their plans.

When making company contributions, the company may be able to deduct them as a business expense.

Employees may be attracted to the SEP IRA for some of the same reasons owners are: tax-deductible contributions, tax-deferred growth and a wide range of investment options. Companies can set up an SEP IRA with a minimum of paperwork and won't have to file a Form 5500.

SEP IRA's aren't right for everybody. Businesses with no employees have other good options, such as an "owner-only 40l(k)." An owner-only 401(k) offers many of the same benefits of an SEP IRA, along with a loan feature.

A tax advisor can help determine which type of retirement plan is best for you. But whichever plan you choose, use it to its full potential. Retirement is expensive so it pays to be prepared.