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Is a SEP-IRA Right for Your Business?

If you’re like many small business owners, running your own business is an all-consuming endeavor.

In the face of everyday demands, choosing a retirement plan for your business can become a casualty. The idea of establishing a plan could evoke worries about complicated reporting and administration.

If this sounds familiar, then you may want to consider whether a Simplified Employee Pension (SEP) may be right for you.

A SEP can be established by sole proprietors, partnerships, and corporations, including S corporations.

The advantages of the SEP begin with the flexibility to vary employer contributions each year from 0% up to a maximum of 25% of compensation, with a maximum dollar contribution of $55,000 in 2018.

Employees Vested

The percentage you contribute must be the same for all eligible employees. Eligible employees are those age 21 or older who have worked for you in three of the last five years and have earned at least $600 (in 2018). Employees are immediately 100% vested in all contributions.

There are no plan filings with the IRS, making administration simple and low cost. You only need to complete Form 5305 SEP and retain it for your own records. This form should be provided to all employees as they become eligible for participation.

Unlike other plans, a SEP may be established as late as the due date (including extensions) of your business’ tax filing (generally April 15th) for making contributions for the prior year.

A Menu of Options

Each eligible employee will be asked to establish his or her own SEP-IRA account and self-direct the investments within the account, relieving you of choosing a menu of investment options for the plan.The rules for accessing these funds are the same as those governing regular IRAs.

Distributions from SEP-IRA and traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.¹

Unlike the self-employed 401(k), which is only available to business owners with no employees, you cannot take a loan from your SEP assets. Distributions from 401(k) plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.¹

The SEP earns the “simplified” in its name and stands as an attractive choice for business owners looking to maximize contributions while minimizing their administrative responsibilities.

1. IRAs have exceptions to avoid the 10% withdrawal penalty, including death and disability.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.

What is the Value of Your Business?

In the third quarter of 2017, more than 2,500 small businesses were sold. The median sale price was $225,000, up from $200,000 the year before.¹

As a business owner, ascertaining the value of your business is important for a variety of reasons, including business succession, estate tax estimates, or qualifying for a loan.

There are a number of valuation techniques, ranging from the simple to the very complex. Outlined below are three of the different approaches to valuing a business.

  1. Asset Based: Calculates the value of all tangible and intangible assets held by the business. This approach ignores the future earning potential of the company. Thus, a pure asset-based valuation model is often used for companies that are bankrupt or looking to liquidate.
  2. Earnings Based: Seeks to arrive at a business’s value by applying a multiple to normalized earnings, i.e., earnings adjusted to subtract owner’s compensation and related expenses. The multiplier can vary substantially, depending upon the industry and the outlook for the business.
  3. Market Based: Compares the business to recent sales of similar companies.

Business valuation is not just a formulaic exercise. For instance, there is a value to the business of being a “going concern” as opposed to the start-up alternative. Ownership percentage will also matter; purchasing a minority share that has limited control may result in a discount to the actual value. The prospects for the business impact value. A greater premium will likely apply to a company engaged in a leading-edge technology than to one involved in a mature market.

Valuing a small business is not an exact science. Some aspect of the valuation may be debatable (e.g., the remaining life expectancy of a machine), while other aspects may be positively subjective (e.g., the value of the company’s reputation).

Willing Seller & Buyer

The true value of anything can only be determined when a willing seller and a willing buyer agree on a price of exchange. As a consequence, any valuation exercise may yield only a rough estimate.

Before moving forward with a business valuation, consider working with legal and tax professionals who are familiar with the process. Also, a qualified business appraiser may be able to offer some valuable insight.

  1. BizBuySell, 2017
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.

Social Security: The $64,000 Question

 

One of the most common questions people ask about Social Security is when they should start taking benefits.

This is the $64,000 question. Making the right decision for you can have a meaningful impact on your financial income in retirement.

Before considering how personal circumstances and objectives may play into your decision, it may be helpful to preface that discussion with an illustration of how benefits may differ based upon the age at which you commence taking Social Security.

As the accompanying chart reflects, the amount you receive will be based upon the age at which you begin taking benefits.

Monthly Benefit Amounts 
Based on the Age that Benefits Begin¹

Age Benefit Amount
62
63
64
65
66 and 4 months
67
68
69
70
$953
$1,018
$1,097
$1,184
$1,300
$1,369
$1,473
$1,577
$1,681

*This example assumes a benefit amount of $1,300 at the full retirement age of 66 and 4 months.

At first blush, the decision may seem a bit clear-cut: Simply calculate the lifetime value of the early benefit amount versus the lifetime value of the higher benefit, based on some assumed life expectancy.

The calculus is a bit more complicated than that because of the more favorable tax treatment of Social Security income versus IRA withdrawals, spousal benefit coordination opportunities, the consideration of the surviving spouse, and Social Security’s lifetime income guarantee that exists under current law.²

Here are three ideas to think about when making your decision:

  1. Do You Need the Money? 
    Retiring before full retirement age may be a personal choice or one that is thrust upon you because of circumstances, such as declining health or job loss. If you need the income that Social Security is scheduled to provide, however reduced, then taking benefits early may be the only choice for you.
  2. Consider the Needs of Your Spouse 
    If your wife is expected to depend on your Social Security income, it’s important to remember that, based on current life expectancy tables, she will likely live longer than you. Consequently, the survivor benefits she receives may be reduced substantially if you begin taking benefits early—a penalty with which she may be burdened for many years to come.
  3. Are You Healthy? 
    The primary risk in retirement is living too long and running out of money. The odds of living a long life in retirement argues for waiting at least until you reach full retirement age so that you receive a full benefit for as long as you live. However, if your current health is poor and/or you have a strong family history of premature death, then starting early may make sense for you.

There are several elements you should evaluate before you start claiming Social Security. By determining your priorities and other income opportunities, you may be able to better decide at what age benefits make the most sense.

  1. Social Security Administration, 2018
  2. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.