Finance: What is SEP?

SEP (Simplified Employee Pension plan) is a personalized pension plan for business owners, and is a form of an IRA.

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Transcript

00:22

to the sep and they get a tax deduction like

00:24

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

00:42

this delay in pink tax is a kind of way

00:45

to fund their own retirement The big catch here is

00:48

that what the big boss pays herself while she has

00:51

to pay to her employees as well Or rather she

00:53

has to contribute the same percentage to their set that

00:57

she has for her own compensation when the step is

01:01

finally distributed often decades later those distributions are then taxed

01:05

at normal ordinary income tax rates So yeah if you

01:09

own a small chain of dry cleaners shops specializing in

01:12

removing blood stains from clothing of mafia victims Well then

01:16

you probably have enough money where it makes sense to

01:19

set up your own set plan That way you can

01:22

defer income and taxes on that income to a much

01:25

later date when presumably your marginal tax rate will be

01:29

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

01:32

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

01:34

five percent then you only keep fifty five cents on

01:38

the last dollars that you earn But a couple of

01:41

decades from now well you might be retired having already

01:44

put your kids through assassins college and now instead of

01:47

needing one hundred sixty three thousand dollars a year in

01:51

net income after taxes while you live just fine on

01:54

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

01:57

sepp which works just like that I remember instead of

02:00

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

02:04

distributed back to yourself Well now you only pay something

02:06

like twenty percent tax so you keep eighty cents on

02:09

those last dollars instead of only fifty five Well a

02:13

set plan highly encourages people to save for old age

02:17

or retirement The key differences between a normal ira and

02:20

accept well in a seth you the business owner are

02:23

the employer so only you contribute money to the sep

02:27

like in normal cos one of the big benefits the

02:30

company provides is matching a dollar for a dollar in

02:33

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

02:37

into your eye right while your company with unlikely contribute

02:40

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