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
Finance allah shmoop what is s e p or sepp
what's that i'm sorry we had to go there Think
simplified employee pension plan except it's basically a personalized pension
plan for business owners and is kind of a form
of an ira The company contribute some amount of money
to the sep and they get a tax deduction like
they can deduct that is just a normal expense of
running The business like engine is part of your normal
operating costs You're running a business That amount of money
is generally capped as a percentage of the total compensation
given to the employees And step is an obvious tax
deferment system for sole proprietors who can take advantage of
this delay in pink tax is a kind of way
to fund their own retirement The big catch here is
that what the big boss pays herself while she has
to pay to her employees as well Or rather she
has to contribute the same percentage to their set that
she has for her own compensation when the step is
finally distributed often decades later those distributions are then taxed
at normal ordinary income tax rates So yeah if you
own a small chain of dry cleaners shops specializing in
removing blood stains from clothing of mafia victims Well then
you probably have enough money where it makes sense to
set up your own set plan That way you can
defer income and taxes on that income to a much
later date when presumably your marginal tax rate will be
lower than it is today That is if today you've
earned two hundred grand and you're marginal tax rates forty
five percent then you only keep fifty five cents on
the last dollars that you earn But a couple of
decades from now well you might be retired having already
put your kids through assassins college and now instead of
needing one hundred sixty three thousand dollars a year in
net income after taxes while you live just fine on
fifty grand So as you distribute back to yourself you're
sepp which works just like that I remember instead of
paying forty five percent tax on that marginal dollar you've
distributed back to yourself Well now you only pay something
like twenty percent tax so you keep eighty cents on
those last dollars instead of only fifty five Well a
set plan highly encourages people to save for old age
or retirement The key differences between a normal ira and
accept well in a seth you the business owner are
the employer so only you contribute money to the sep
like in normal cos one of the big benefits the
company provides is matching a dollar for a dollar in
ira contributions So if you're saving five grand a year
into your eye right while your company with unlikely contribute
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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