What is a SEP IRA?
A SEP IRA, Simplified Employee Pension, is a retirement plan to which employers can make tax-deductible contributions on behalf of eligible employees, including the owner.
Who Can Establish a SEP IRA?
Any employer with one or more employees can create a SEP plan for their business. This includes self-employed business owners. SEP IRA plans work for sole proprietorship’s, partnerships, corporations, and nonprofit organizations. Any employee who is over the age of 21 and earns at least $550 per year and has worked three out of the past five years for the employer is eligible to participate in the SEP plan.
What are some unique attributes of SEP IRAs?
SEP plans are easy to administer and the costs associated with creating and maintaining SEPs are low compared to 401(k) plans and other qualified employer retirement plans. Contributions are discretionary, allowing the employer to decide each year if they want to fund the SEP for that given year. Contributions to SEP IRAs are immediately vested. This means that employees have access to the funds at any time, regardless of if they are still working for the business.
What Are the Rules Regarding Contributions?
SEP contributions are decided by the employer each year. Employers can contribute up to 25% of an employee’s compensation, as long as the contribution does not exceed $54,000 (for 2017). Employers must contribute equal percentages of salary to each eligible employee. An exception occurs when 25% of an employee’s W-2 compensation would exceed the $54,000 limit. In this case the employee would be capped at the $54,000 limit.
SEP IRA Summary Details
Highlights of SEP IRAs
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Any employer with one or more employees can create a SEP plan
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Easier and cheaper to administer and maintain compared to other retirement plans such as 401(k)s
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SEP contributions are made on a discretionary basis
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Contributions to SEP IRAs are immediately vested
Taxation
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Employee and employer contributions are tax deductible
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Investments grow tax deferred within the account
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Distributions in retirement are taxed as ordinary income for the participant
Employer Eligibility
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Any employer with one or more employees can create a SEP plan
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Cannot have any other employer retirement plans in place
Employer Contributions
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Employer may contribute up to 25% of employee’s compensation up to $54,000 (for 2017).
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Employer contributions are discretionary and the employer may elect to not make any contributions in a given year
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Employers must contribute equal percentages of salary to each eligible employee
Employee Contributions
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Minimum: $0
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Maximum: $5,500, individuals older than 50 my contribute an additional “catch-up” $1,000 (for 2017)
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Employee’s contributions to their SEP IRA are counted towards their total allowable IRA contributions for the year. Meaning an employee (under age 50) that contributes $5,500 to their SEP IRA would not be able to make any contributions to a Roth IRA.
– Wyatt Swartz
– Contributions by Eli Perlmutter
– 4/7/2017
What is a simple IRA?
A SIMPLE IRA, Savings Incentive Match Plan for Employees, is a version of a traditional IRA for small businesses and self-employed individuals. Similar to other traditional IRAs, contributions are tax deductible and investments grow tax deferred until the account holder withdraws money in retirement.
What is the difference between a SIMPLE IRA and a SEP IRA?
SIMPLE IRAs allow employees to make contributions, unlike SEP IRAs. With a SIMPLE IRA, employers are required to make a fixed contribution or elect to match a higher percentage of an employee’s contributions. If the employer elects to make matching contributions, they are not required to contribute to the IRA unless the employee contributes.
What are the benefits of a SIMPLE IRA?
SIMPLE IRAs have higher contribution limits than traditional and Roth IRAs. They are cheaper less cumbersome to set up and maintain than most other workplace retirement plans, such as a 401(k) plan.
From the Employer Perspective
To set up a SIMPLE IRA plan, an employer must have 100 or fewer employees who are each earning more than $5,000 per year. This includes any employee who worked at any point in the calendar year. The employer can not have any other retirement plans in place besides the SIMPLE IRA. The company must use the same contribution plan for each employee.
How much can be contributed to a SIMPLE IRA?
An employee can contribute a percentage of compensation up to a limit of $12,500 for 2016. If the employee is older than 50, they can make an additional $3,000 “catch up” contribution. As long as the employer maintains the plan they must elect to contribute a fixed percentage of compensation, or to match the employee’s contribution up to 3% of compensation. If the employee does not contribute to their IRA and the employer elects to follow the matching contribution plan, then they are not required to contribute any amount to the employee’s account.
Is a SIMPLE IRA right for you?
SIMPLE IRAs are a good fit for small business owners or self-employed individuals who have not set up any other type of work-related retirement plans. Unlike profit-sharing or 401(k) plans, SIMPLE IRAs are easy to set up, administer, and maintain.
Self-employed individuals that plan on bringing on more employees also benefit from SIMPLE IRAs, as adding employees to a SIMPLE IRA is a relatively easy process.
SIMPLE IRA Summary Details
Highlights of SIMPLE IRA
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Employees can make contributions to the account
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Easier and cheaper to administer and maintain compared to other retirement plans such as 401(k)s.
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Tax Benefits
Taxation
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Employee and employer contributions are tax deductible
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Investments grow tax deferred within the account
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Distributions in retirement are taxed as ordinary income for the participant
Employer Eligibility
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Company must have less than 100 current employees
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Cannot have any other retirement plans in place
Employer Contributions
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Minimum: 2% of employee’s compensation or match 3% of employee’s contributions
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Maximum: $12,500 annually
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If employer elects to make matching contributions, and the employee does not contribute to the plan then the employer will not contribute to the employee’s account.
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Each employee must receive the same compensation plan
Employee Contributions
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Minimum Contribution: $0
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Maximum Contributions: 100% of compensation up to $12,500 annually
– Wyatt Swartz
– Contributions by Eli Perlmutter
3/23/2017
Sources:
http://money.cnn.com/retirement/guide/IRA_SIMPLE.moneymag/
https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-contributions
http://www.investopedia.com/university/retirementplans/simpleira/
After a stalemate 1st quarter the Atlanta Falcons stormed to a dominant 21-3 lead over the New England Patriots going into halftime of Super Bowl LI. The Falcons were steamrolling ahead. They were winning the line of scrimmage battle on offense and defense and eventually took a 28-3 lead in the 3rd quarter. However as the game progressed, the Falcons appeared to wear down. A combination of: running out of gas, inflated sentiment and expectations, and poor decision making would eventually derail the Falcons and lead to the Patriots scoring 28 unanswered points to win the Super Bowl 34-28. It was the biggest comeback or collapse in Super Bowl history.
The Falcons’ regular and post-season run resembled that of an unloved bull market. Initially in the season most pundits and fans were pessimistic about the Falcons saying “didn’t they start 6-0 last year and miss the playoffs?” Later the sentiment around the Falcons transitioned into skepticism, “there offense is good, but you can’t win with that defense, and they can’t get it done when it counts.” All the while the Falcons were rolling ahead stacking up win after win. Finally things moved to optimism going into the Super Bowl and by the end of the first quarter. Somewhere between 21-3 and 28-3 everyone was buying the Falcons’ stock. Falcons’ owner Arthur Blank was seen celebrating on the field and the game wasn’t even in the fourth quarter yet. It was right at that peak of euphoric bandwagon sentiment that the Falcons ran out of steam and the bottom fell out.
Stocks tend to have a very strong final push at the tail end of bull market runs. They are pushed to new highs by overly optimistic sentiment until the expectations simply can’t keep up with the economic reality and like the Falcons the bull market eventually runs out of steam.
I am not predicting that we are about to head into a bear market by any means, but as investors we should always be assessing the markets defining where we believe to currently be in the market cycle, positioning the portfolio and visualizing possible scenarios. After the US presidential election it is clear that optimism in the markets is on an uptick. Typically the biggest gains in bull markets come in the beginning portion and the ending portion of the cycle. Remember the 1990s bull run and those final couple of years and their massive returns. Keep in mind that late stage push of a bull market can and has run for several years.
I see there being two major stories or themes in 2017 regarding the markets.
Volatility
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2016 saw the first full correction in markets in several years, and two mini/almost corrections following the US presidential election and following the Brexit vote. We also saw capital markets make sharp moves based on headlines backed by little or no substance, specifically Donald Trump tweets.
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When stocks make sharp & fast gains to the upside, they tend to be more susceptible to sharp downside corrections. These all-time highs are likely to be accompanied by corrections along the way. Get ready for increased volatility.
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It is important to note, that corrections within bull markets are perfectly normal and help extend the life of the bull market. We must distinguish between corrections and bear markets as investors.
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Last week’s +1% push in markets in a day, was a perfect example of this increased volatility. Keep in mind volatility can be to the upside and to the downside.
How does reality match expectations?
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Markets have been rolling higher and higher since the election. There is an expectation that the new administration will reduce business regulations, reform corporate taxes, and enact a stimulus package. How will markets react when these things don’t play out as expected or don’t lead to the expected results?
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The Trump administration has been big on statements, but there has been very little specifics or action. If the new “phenomenal” tax plan isn’t so phenomenal, and the stimulus package proves to be a dud markets will be tested.
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I predict that there will be multiple setbacks to the administrations “pro-growth, pro-business” plans, and that markets will likely overreact to the point of correction. Sometimes it is wise to “under-promise and over-deliver,” right now promises are high and it will be difficult to meet those expectations in the short-term.
Over the long-term capital markets are influenced by economics above all other drivers. We as investors can reasonably assume that the global economy will continue to expand and advance much as it has over the last 100 years; and therefore we will continue to reach new all-time highs in capital markets over the long-term.
Over the shorter term new information, and the relationship between expectations and reality in terms of economics, politics, and sentiment will move markets.
Economics
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The consensus expectation for 2017 economic growth is hovering around “more of the same” to “slightly accelerated.” Overall, global recession looks unlikely without outside/unforeseen contributing forces as the cause. Potential areas of concern include geopolitical upheaval and political/economic protectionism from populist movements. Left to the status quo, the global economy should expand in 2017 and potentially at a pace above the norm for the economic expansion of the last 8 years.
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After reviewing forecasts from JP Morgan, Goldman Sachs, and Wells Fargo Advisors, I expect global GDP growth around +3.5% in 2017, US growth of +2-3%, with potential for 2-3 Fed rate hikes, Europe +1.5%, Japan +1-2%, China +6%, and the UK with +1.5%. The growth expectations aren’t anything to dance in the streets about, but they are perfectly sufficient for stocks to continue the bull market run.
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I see two areas of concern: a stall in earnings growth, and Chinese upheaval. In the short-term markets will jump up or down based on the gap between expectation and reality, and if realty proves to be not so “phenomenal” it could push stocks sharply down fast. The key there is that a short and sharp correction is the more likely result than a prolonged steady decline bear market. The other area of concern is China. China has major structural concerns within it’s economy and it is very reasonable that it will show its ugly head again in 2017 like Q1 of 2016. At the end of the day, Chinese fears are likely to prove much the same way as last year…. short-term overreaction followed by the realization that China does not pose a contagion threat to the health of the global economy.
Politics
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US elections may be over, but there are major elections due up in Germany, France and the Netherlands in 2017. These elections are sources of opportunity in Europe, but also major risks. A changing of the guard in these major European countries will add uncertainty and volatility in the Euro markets. Last year we got the Brexit vote and the Trump victory, it will be interesting to see if populism movements continue to dominate world politics in 2017. For all of the perceived dangers that the regime change in the US has, the same fears and possibilities are there in these major European countries. We will be keeping a close eye on these elections.
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On March 15th 150 representatives will be elected to the Netherlands House of Representatives. The first round of the French presidential elections is on April 23rd. German federal elections will occur on September 24th. Investors should be monitoring the outcomes and potential implications of these elections.
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Protectionism is bad for everyone. Populist movements are being accompanied by very dangerous protectionist economic ideas. While I think that disastrous trade policy will be stopped by Congress in the US, the danger of it being enacted in France, Germany, or the Netherlands is still very real.
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In the USA there is an expectation of some tax cuts and/or reforms that will lead to an immediate increase in EPS among corporations. There is also and expectation that there will be deregulation and a possible stimulus package. For a time the expectations will be enough to move markets higher, but eventually there will need to be action and results to keep the party going strong.
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Corporate tax reform, and deregulation sound great, however an economic stimulus package has disappointment written all over it. The Keysian theory is that to boost or jumpstart the economy the federal government will temporarily increase spending on “projects.” It is an ingenious theory, but as we stand today the evidence suggests that it doesn’t work. It didn’t work under FDR, it didn’t work under Clinton, Busch or Obama. In fact the recent history of federal stimulus packages is a run up in expectations, followed by a disappointing temporary uptick in economic numbers, followed by small recession after the stimulus money has ended. Federal stimulus packages are kind of like when you went to see Indiana Jones and the Crystal Skull. You were so excited that Indy was back, you watched the originals again, all this expectation only to be super disappointed with the result. You were so disappointed that you needed time to recover and forget that you had ever gotten excited about such a terrible movie.
Sentiment
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Gauging sentiment in the markets is not an exact science, but it is imperative that we look at the indicators we have. We are able to track things like mutual/index fund inflows to see how many investors are moving into stocks and compare that with historical figures. We can compare prices/earnings and other stock valuations with historical data. We can track the number of bullish/bearish articles being published, and the number of IPOs being brought to market. We can track how many of those IPOs are companies that do not actually turn a profit, yet are being bought up by investors. We can monitor the amount of hedging being done in the markets, and last but not least we can talk to people make assumptions based on our discussions. After we have done all of these things we can make a general assumption as to the sentiment level of the markets.
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Right now, I feel pretty comfortable in saying that sentiment in the markets is improved and potentially continuing to improve. Many like to say that “the animal spirits have been awaken” and that is a good analogy. Enthusiasm can be contagious and it certainly looks like that has started to be the case. We as investors need to be watching and monitoring that optimism and enthusiasm doesn’t transform into irrational exuberance.
Risks
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Trade Protectionism: Whether it is in the USA or abroad there has been momentum behind protectionist policies. Nothing is more dangerous to the overall health of the economy than the implementation of such polices. When participants take part in trade, the buying and selling of goods/services via their own volition it is positive for all parties. There zero sum economic theory is false, and dangerous.Tariffs are a tax on consumers, raising the price of goods and increasing inflation. They also invite retaliation by foreign countries.
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Erratic Politics: President Trump has been erratic thus far in his term. His behavior has been a major contributor to the sharp movements we have seen in capital markets in 2017. If his erratic behavior continues it could eventually be a drag on the markets. Capital markets, generally respond well to predictability and boringness.
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Geopolitics: Conflicts abroad are always a threat to capital markets and economic expansion. Many times I have heard the false narrative that “wars are good for the economy, think WWII.” Without going into a full lesson in history and economics, I will simply say that “war and geopolitical conflicts are not good for the economy.” War typically does create an environment of winners and losers where certain industries and individual companies benefit mightily from the conflict. We should not confuse those specific and anecdotal results for being an overall boost in economics. Specific theaters of risk right now include but are not limited to: North Korea, Eastern Europe/Russian, and of course the Middle East.
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Political Letdown: Right now there is a lot of hope built into the market. It is impossible how much exactly, but it is fair to say that there is optimism for coming tax reform, deregulation, and a stimulus package in the US. How far do capital markets run, and how far do they pullback when things don’t pan out quite so nice?