SEP IRAs

    Useful savings plans for the smallest businesses.


    Provided by MidAmerica Financial Resources

    Do you own a small business with a few employees? Are you self-employed? In either case, the SEP IRA may be the ideal low-cost, easily administered retirement savings plan for you.

    This is a simple pension plan using a traditional IRA. (SEP stands for Simplified Employee Pension.) It lets you put aside money into individual IRAs for you and your employees, with lower administrative fees and less paperwork than other types of retirement plans.1

    Tax-deferred compounding of pre-tax dollars. You contribute pre-tax dollars to a SEP IRA, and that has the effect of lowering your tax bill. The money in the IRA grows tax-deferred, and your business doesn’t pay any taxes on the IRA earnings.1 The assets can be invested in many ways.

    The traditional IRA rules apply. When you take the money out of a SEP IRA for retirement, you pay ordinary income taxes on it. (Should you withdraw SEP IRA assets before age 59½, you’ll likely be assessed a penalty, with some exceptions.)2

    Contributions are discretionary. Each year, you can contribute or not contribute to the IRA(s) involved. The amount you put into the IRA(s) can also vary.1

    In 2011, you can contribute up to 25% of an eligible employee's compensation, up to a limit of $49,000. No catch-up contributions are permitted for older employees.3

    A three-point employee eligibility test. Generally, employees of a small business are eligible for a SEP IRA if they 1) are older than 21, 2) have worked for the business in at least three of the five years preceding the year in which the IRA contribution is made, 3) have received $550 or more in compensation from the business in 2011 (this can rise with COLA adjustments in future years). However, the IRS states that an employer “may use less restrictive requirements to determine an eligible employee.”3

    Employees covered by a union contract may be excluded from a SEP, as well as non-resident aliens who have not earned income from your business.3

    All eligible employees must participate in the SEP – including part-time and seasonal workers and employees who die, quit, or get laid off or fired during the year.1

    Are you self-employed? Assuming your business is unincorporated, you can contribute up to 20% of your net adjusted self-employment income to a SEP each year. If you have a bad year, you have the option of skipping your SEP contribution, and no penalty will come your way if you do.4

    Starting up a SEP IRA is easy. You can open up one of these plans with the help of almost any financial professional or financial institution. In fact, you can even have other retirement plans at your business in addition to SEP IRAs, and you can set up a SEP IRA for your small business even if you are already participate in another retirement plan at another company.3

    Sole proprietors, partnerships, and corporations can all create SEPs. In fact, they may qualify for annual tax credits of up to $500 during the plan’s first three years, which can be applied toward the plan’s start-up costs.1 So if you have a small business or work on your own and you want a retirement plan that works for your future without a lot of hassles, talk to a financial professional to see if a SEP IRA is right for you.

    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com. www.mid-america.us


    These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Professional for further information.




    1 dol.gov/ebsa/publications/SEPPlans.html      [2/20/09]

    2 investopedia.com/university/retirementplans/sepira/sepira3.asp           [2/20/09]

    3 http://www.irs.gov/retirement/article/0,,id=111419,00.html     [09/28/11]

    4 publicradio.org/columns/marketplace/gettingpersonal/2008/09/_question_i_understand_that_1.html           [9/29/08]

  • Mistakes Families Make with 529 Plans

    5 common errors to avoid 2 big factors to consider.


    Provided by MidAmerica Financial Resources


    Most families that start 529 college savings plans have done their “homework” about these programs. Missteps are made, though, often with the distribution of 529 plan assets. Here are some of the major gaffes, and the major factors anyone should think about before enrolling.


    Assuming a university will withdraw 529 plan assets for you. When the time comes, you have to tell the 529 plan that you need the money and specify the payee. Typically, a 529 program offers you either a check written out to you, to your student, or a payment made directly from the 529 plan to the university. There are two big reasons why a check made payable to the student may be the best option.


    *A  529 plan distribution triggers a Form 1099-Q. You most likely want your student’s name and Social Security number on that form, not yours. If your student’s name is on the 1099-Q and your student has qualifying higher education expenses (QHEE) equaling or exceeding the gross distribution figure for that tax year listed on the form, that whole 529 plan withdrawal becomes tax-free and the distribution from the 529 doesn’t show up on the student's Form 1040. If your name is on the 1099-Q,  the distribution doesn’t show up on your 1040. Even if your student’s QHEE equals or exceeds the magic number on the 1099-Q for the tax year, an omission may trigger an IRS notice to you, and you will have to defend the exclusion.1


    *Let’s say you accidentally overestimate your student’s qualified education expenses, or maybe parents and grandparents make withdrawals without each other’s knowledge. In this event, the earnings portion of the distribution is partly or fully taxable. If the distribution is paid out to you, then the earnings are taxed at your federal tax rate. If it is made payable to your student, then the earnings are taxed at his or her federal tax rate, which barring the “kiddie tax” is presumably just 10-15%.1


    Having a payment made directly the school can lead to a second common mistake.


    Inadvertently reducing a student’s financial aid potential. When a university takes a direct payment from a 529 plan, its financial aid office may make a dollar-for-dollar adjustment to the need-based aid a student receives. Often, it is viewed the same as scholarship money.1


    Since the IRS bars you from using multiple education tax benefits to pay for the same education expenses, using tax-deferred 529 plan earnings to pay for the first semester of college may disqualify your student for an American Opportunity Credit. You should read up on the IRS income restrictions on education credits or consult a tax professional. Paying the first few thousand dollars in freshman year expenses with funds outside the plan may allow your student to retain eligibility.2


    Mistiming the distributions. It can take up to two weeks to arrange and carry out a 529 plan distribution; telling a financial aid office that you are using 529 funds to pay tuition just a few days before a tuition deadline is cutting it close.3


    Some families withdraw 529 monies during freshman year, which can conflict with federal tax returns. If a tuition payment is due in January, withdrawing it in December will create an incongruity between total withdrawals and expenses. The same will apply if a withdrawal is made in January, but tuition was due in December.3


    Botching the tax break offered to you on the distribution. To get a tax-free qualified withdrawal from a 529 plan, the withdrawn funds have to be used for qualified, college-related expenses. If the distribution isn’t qualified, it will be considered fully taxable, and you may be hit with a 10% federal penalty plus state and local income taxes. If you withdraw more plan assets than necessary, any excess distribution is also nonqualified. Calculating and withdrawing the "net" qualifying expenses of your student’s college education could help you avoid this last problem, or alternately, you could report the excess 529 funds on the student's 1040.3,4,5


    Ceasing 529 contributions once a student enters college. You can keep putting money into a 529 plan throughout your student’s college years, with the opportunity for additional tax-deferred growth of those savings.2


    Finally, two other factors are worth noting. These would be a 529 plan’s expenses and deductions.


    Tax deductions represent a key reason why families choose in-state 529 plans. Most states that levy income tax offer 529 programs with deductions or credits for taxpayers. It varies per state. In Michigan, a married couple can deduct the first $10,000 of 529 contributions annually, which leads to a state tax savings of up to $425. Some other states offer no deductions.6


    Some 529 plans have different advantages. If your home state’s 529 plan expense ratio exceeds 1%, consider another state’s plan. (You can find objective rankings of 529 plan expenses online.)


    Lastly, compare the expenses and fund choices offered by a 529 plan to those of other funds or investment vehicles found outside the 529 wrapper.


    Make no mistake, 529 plans offer great potential advantages for households striving to meet future college costs. Just remember to read the fine print, especially as your student’s freshman year draws closer.


    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com. www.mid-america.us


     An investor should consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. Most states offer their own 529 programs which may provide advantages and benefits exclusively for their residents and taxpayers. The tax implications of a 529 plan should be discussed with a qualified tax advisor.  Investing in a 529 plan involves risk including the potential loss of principal invested.


    This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.



    1 - www.bankrate.com/finance/college-finance/3-ways-to-take-a-529-plan-distribution.aspx [10/5/09]

    2 - www.usnews.com/education/best-colleges/paying-for-college/articles/2012/08/01/4-costly-mistakes-parents-make-when-saving-for-college [8/1/12]

    3 - www.savingforcollege.com/articles/20101001-5-blunders-by-first-time-529-plan-spenders [10/01/10]

    4 - www.foxbusiness.com/personal-finance/2011/11/14/dont-make-your-52-plan-distribution-taxing/ [11/14/11]

    5 - www.529.com/content/benefits.html [3/28/13]

    6 - www.forbes.com/sites/baldwin/2013/03/27/the-two-step-guide-to-529s/ [3/27/13]