2014 SEP IRA Contribution Deadline Approaches

By Sarah Brenner, IRA Technical Expert

Are you self-employed or a small business owner and your business expenses go on your individual tax return? If so, and you have an extension for filing your 2014 federal income taxes, you may want to consider making a SEP contribution for 2014. It is not too late! Here is how it works.

The deadline for making a SEP IRA contribution for the year is the business’ tax-filing deadline, including extensions. If you have an extension to file your 2014 federal income taxes until October 15, 2015, you are still eligible to make a SEP IRA contribution until that date. This deadline is different than the deadline for traditional IRA and Roth IRA contributions, which is the tax-filing deadline, not including any extensions. That deadline was April 15, 2015. Your SEP contribution may be made to an IRA under an existing SEP IRA plan or you may still establish a new plan for 2014.

Only an employer may establish a SEP IRA plan. The employer could be a sole proprietor, a partnership or a corporation. There are no limits on the size of an employer who can establish a SEP IRA plan, but because they are easy and inexpensive to administer, they are attractive to smaller employers. Establishing a SEP IRA plan is an easy three step process. The employer will sign a SEP IRA plan agreement, give a copy of the agreement to the employees, and the employees then establish IRAs to accept SEP IRA contributions. Many employers will use the IRS model form (Form 5305-SEP) to establish SEP IRA plans. There are only six spaces for the employer to fill out on this form.

For 2014, an employer may make deductible contributions up to the lesser of $52,000 or 25% of compensation. Only the first $260,000 of an individual’s compensation is considered for 2014. For employees, compensation is usually wages as reported on Form W-2. If you are self-employed, you must use a special formula to calculate your compensation. A worksheet with the calculation can be found in IRS Publication 560. Generally, the employer must contribute the same percentage of compensation for each employee. You cannot contribute 25% of compensation for yourself as the owner and only contribute 10% of compensation for each of your employees.

SEP IRA plans offer you flexibility. If your business has a good year, you can contribute a higher amount. In a bad year, you can contribute a smaller amount or even nothing at all. Every eligible employee must receive a SEP IRA contribution or all the contributions to other employees will be considered to be excess contributions. This includes employees who are part-time or left employment during the year. Individuals who have attained age 70 ½ are eligible for SEP IRA contributions, even though they may not make traditional IRA contributions.

Under the law, employers may only exclude certain employees from SEP IRA plan contributions. These include employees who are not yet age 21, union members, nonresident aliens with no U.S.-based income, and those who either received less than $550 in compensation or have not met the years of service requirements.

After a SEP IRA contribution is made, it is treated like other IRA funds and subject to the same rules. The employer is not required to administer the funds. Employees have access to their SEP IRA contributions immediately after receiving them. However, if they take distributions, there would be the same tax and early distribution penalty consequences that there are with any traditional IRA contributions.

Is a SEP IRA plan right for your business? These plans offer a simple and affordable way to save for retirement and get a tax break. Time is running out for many business owners to take advantage of these benefits for 2014. If your business’ 2014 federal income tax-filing deadline is October 15, 2015, now is the time to consult with a knowledgeable financial advisor to decide whether a SEP IRA plan is a good strategy for you.

Special Needs Trusts vs. ABLE Accounts - Which is Better?

By Jeffrey Levine, IRA Technical Expert

ABLE (Achieve a Better Living Experience) accounts are a brand new type of tax-favored savings account created to benefit young disabled persons. In order to have an ABLE account established for a person, they must be disabled (or blind), as defined by the tax code, and such disability (blindness) must have occurred before the person’s 26th birthday.

There’s a lot that’s been written about the rules for ABLE accounts, and a simple Google search will lead you to any number of articles that will provide that important information. But for those that understand the rules and are planning for a disabled person, one of the questions that has been asked with increasing frequency is, “Should I use a special needs trust or an ABLE account to safeguard my money [for my special needs beneficiary]?”

There’s no simple answer to this question, because it involves looking at a number of different factors, but below are 5 key areas to consider, along with a brief description of whether a special needs trust or an ABLE account gets the edge in that particular area.

1. Amount that can be safeguarded without impacting benefits

Edge to special needs trusts – Unlimited amounts can be left/gifted to a 3rd party special needs trust without impacted federal/state benefits. On the other hand, SSI benefits will be suspended once an ABLE account’s value exceeds $100,000. In addition, there is no limit on the amount of funds that can be bequeathed/gifted to a special needs trust, whereas ABLE account contributions are limited to $14,000 (for 2015).

2. Potential uses of funds

Slight edge to special needs trusts – While the definition of qualifying disability expenses for ABLE accounts is fairly liberal, special needs trusts drafted with the appropriate language can allow for an even broader array of expenses.

3. Tax efficiency

Edge to ABLE accounts (big time!) – Any income that is generated by a special needs trust and not paid out of the trust to trust beneficiaries within the accounting year is subject to the brutal trust tax rates. In contrast, distributions from ABLE accounts, including earnings, will be entirely tax free if used for qualified disability expenses.

4. Legacy to future beneficiaries

Edge to special needs trusts – Any amounts left in a person’s ABLE account at the time of their death will first be used to repay publically provided benefits. That will probably wipe out the balance in most of those accounts. In contrast, if a special needs trust is established and implemented properly, the trust assets at the time of the special needs person’s death can be left to other heirs.

5. Cost and complexity

Edge to ABLE accounts – Trusts can be very expensive to create and administer. They also add a lot of complexity. ABLE accounts, on the other hand, will have minimal expenses and will be far simpler to implement. ABLE accounts are not required to file tax returns (like trusts are), and the income earned in the account will generally not be subject to income taxes.

So what’s better for you and your family? That is an issue best addressed with a qualified professional who specializes in planning for those with disabilities. However, determining which of these five key issues are important to you – and how important they are – will help you to make an informed decision.