- [Instructor] Very few people like paying taxes.
One of the best ways to reduce your taxes
is to contribute to tax-deferred retirement accounts.
SEP retirement accounts, S-E-P, SEP,
are by far the best tax advantage
retirement accounts out there in my opinion.
They have a much higher contribution limit
than anything else that I'm aware
of that you can use as a small business owner,
and they're independent of 401ks,
so they're great for people running
a part-time business or an independent side gig.
But, there are some land mines you need to avoid though.
Let me talk you through it.
Now, the primary form that you're going
to use when dealing with SEPs to start
with is the 5305-SEP.
And this essentially just says the amount
of money that you're going to contribute
based on particular services of given employees.
The first land mine you want to be aware
of with the SEP account is that if you have
a business, you have to contribute money
to a SEP IRA on behalf of all employees
that meet a particular requirement.
So, you can set what the requirements
are as long as they're reasonable
from the IRS' point of view.
In particular, you can require that employees
have to have worked for at most, say three
of the last five years.
So if an employee hasn't worked for you
for at least three years, you wouldn't have
to make any contribution to them.
However, if an employee has worked
for three of the last five years for you,
then, if you are going to contribute
to your own SEP account, you also have
to contribute to the employee's SEP account.
Now the nice thing about the SEP accounts
is that you can contribute up to $41,000 per year.
So it's a much higher level than say a 401k.
Now of course, once you combine this with
a 401k with a level that changes
over time, but is roughly 20 grand,
now you're up to 60 grand a year
that you can take off of your income
and put into a retirement account
and then invest for the future.
So that's the really nice feature about SEPs.
The key though is to make sure
that you've got a restrictive SEP plan
so that you won't have to contribute
on behalf of other employees, unless you choose
to of course.
The SEP account is based
on the first 205,000 of compensation,
so you can contribute up to 25% of compensation,
but only for that first 205,000,
because that's what gets you to the 41,000-dollar limit.
You have to contribute the same percentage
of compensation for every single employee
that's out there though.
Now, you can contribute to the SEP account
each year, and you put it into a special account
set up with an IRA trustee or a custodian,
or an insurance company.
That sounds complicated, but the reality
is that most of the big stock brokers out there now
let you open up a SEP IRA account with very little work.
Schwab, TD Ameritrade, E-Trade, it's trivial
to open one up and then you can just contribute
to it each year when you're ready.
Again, this is a great way to reduce
your taxable income, you just have
to be careful about whether or not you want
to contribute on behalf of the employees that work for you.
Now you're prepared to use a SEP account
to reduce your own tax liabilities.