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Finance allah shmoop what is s e p or sepp

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

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

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plan for business owners and is kind of a form

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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

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running The business like engine is part of your normal

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

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is generally capped as a percentage of the total compensation

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given to the employees And step is an obvious tax

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deferment system for sole proprietors who can take advantage of

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this delay in pink tax is a kind of way

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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

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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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