Baby boomer business owners – Consider a SEP-IRA

The Wall Street Journal suggests that Joe the Plumber should get a SEP-IRA to protect his profits from being taxed. So what is a SEP-IRA?

A SEP-IRA is a Simplified Employee Pension IRA (Individual Retirement Account), which allows you to make contributions to your own and employee retirements. SEP-IRAs essentially function as “profit-sharing” plans, because they allow contributions based on owner and employee compensation, including bonuses.

SEP-IRAs work the same way as other types of IRA’s:

• Limits on how much you can contribute to them each year,

• Penalties and interest for withdrawal before age 59 1/2 (with some exceptions).
• Catch-up provisions to allow baby boomers to add more money to their account ($5,000 for 2008) each year.

Of course, it’s the IRS, so there are other restrictions and requirements, including the requirement that you must make the same percentage contribution for each employee.

The main benefit to a SEP-IRA is the increased amount of contribution allowed, based on compensation. The limit for 2008 is $45,000 or 25% of compensation up to $225,000, whichever is lower. This is significantly more, in most cases, than a traditional IRA, so if you can set aside some money for this purpose, it’s worth it to do so.

For more information, check out IRS publication 560.