Salary Reduction Simplified Employee Pension Plan - SARSEP

  

Categories: Retirement

In the old days, Salary Reduction Simplified Employee Pension Plans were used by small companies to help their employees save for retirement. When we say "old days," we mean back before Marvel movies took over Hollywood, and back when you used a physical disk to listen to music. But, more pertinent to the current topic...back before 401(k)s became a major Thing.

Under the SARSEP, companies could put money aside for employees through contributions to IRAs. These contributions, which were made with pre-tax dollars, came with salary reductions for the employees. So, basically, the companies trimmed the employee's salary, but put that money into an IRA for them instead. That process included a tax break for the money contributed.

Like CDs and theatrically released romantic comedies, these plans have disappeared from the marketplace. A new law passed in 1996 changed many of the rules surrounding retirement funds. Since then, 401(k)s have become more widespread. Meanwhile, a new structure, called the Savings Incentive Match Plan For Employees Of Small Employers (or SIMPLE), filled in the void left by the departing SARSEPs.

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Finance: What is SEP?5 Views

00:00

Finance allah shmoop what is s e p or sepp

00:07

what's that i'm sorry we had to go there Think

00:10

simplified employee pension plan except it's basically a personalized pension

00:16

plan for business owners and is kind of a form

00:19

of an ira The company contribute some amount of money

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to the sep and they get a tax deduction like

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they can deduct that is just a normal expense of

00:27

running The business like engine is part of your normal

00:30

operating costs You're running a business That amount of money

00:32

is generally capped as a percentage of the total compensation

00:36

given to the employees And step is an obvious tax

00:39

deferment system for sole proprietors who can take advantage of

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this delay in pink tax is a kind of way

00:45

to fund their own retirement The big catch here is

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that what the big boss pays herself while she has

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to pay to her employees as well Or rather she

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has to contribute the same percentage to their set that

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she has for her own compensation when the step is

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finally distributed often decades later those distributions are then taxed

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at normal ordinary income tax rates So yeah if you

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own a small chain of dry cleaners shops specializing in

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removing blood stains from clothing of mafia victims Well then

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you probably have enough money where it makes sense to

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set up your own set plan That way you can

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defer income and taxes on that income to a much

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later date when presumably your marginal tax rate will be

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lower than it is today That is if today you've

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earned two hundred grand and you're marginal tax rates forty

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five percent then you only keep fifty five cents on

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the last dollars that you earn But a couple of

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decades from now well you might be retired having already

01:44

put your kids through assassins college and now instead of

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needing one hundred sixty three thousand dollars a year in

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net income after taxes while you live just fine on

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fifty grand So as you distribute back to yourself you're

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sepp which works just like that I remember instead of

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paying forty five percent tax on that marginal dollar you've

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distributed back to yourself Well now you only pay something

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like twenty percent tax so you keep eighty cents on

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those last dollars instead of only fifty five Well a

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set plan highly encourages people to save for old age

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or retirement The key differences between a normal ira and

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accept well in a seth you the business owner are

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the employer so only you contribute money to the sep

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like in normal cos one of the big benefits the

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company provides is matching a dollar for a dollar in

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ira contributions So if you're saving five grand a year

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into your eye right while your company with unlikely contribute

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an additional five grand into it So yeah in a 00:02:43.75 --> [endTime] nutshell that is wass ab sip Maybe not Whoa

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