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SEP IRA
SEP (Simplified Employee Pension) IRA
A Simplified Employee Pension (SEP) IRA is a written arrangement that allows an employer to make contributions for employees' retirement, or personal retirement if self-employed, without becoming involved in a complex retirement plan. It is typically preferred by self-employed individuals or business owners with only a few employees. A SEP is an Individual Retirement Account (IRA). If maintained for more than one person, a SEP becomes a group of IRAs. Contributions for any participant are deposited into an IRA in the name of the participant.
Advantages of a SEP IRA
EASE OF USE
The SEP IRA is the easiest plan to set up and maintain. A SEP IRA plan eliminates:
- the administrative complexity found in many retirement plans;
- lengthy and detailed government reporting;
- numerous nondiscrimination tests; and
- complicated, restrictive contribution formulas associated with many retirement plans.
TAX BENEFITS
Employer Contributions are deductible from income in the year paid or the prior year until the tax filing deadline. Similar to a Traditional IRA, the plan's earnings are not taxed until they are withdrawn at retirement. All of the money contributed to a participant's account immediately belongs to that person.
FLEXIBILITY of CONTRIBUTIONS
Contributions to a SEP IRA can be very flexible. The employer is not required to make contributions on an annual basis but must contribute the same percentage for all employees. If you have earned income after the age of 70 1/2, you are still allowed to contribute.
SEP IRA Contributions
An employer may make an annual contributions of up to 25% of compensation, as much as $45,000 for the 2007 plan year, whichever is less. You may only consider up to $225,000 for the 2007 plan year (subject to annual cost-of-living adjustments for later years). Contributions must be made in cash. Employer contributions for each eligible employee will be the same percentage of compensation for all employees. An employer is not required to make SEP IRA contributions every year.
Who is an eligible employee?
All eligible employees must be allowed to participate in the SEP. An eligible employee is an individual who: - is at least 21 years old;
- has performed "service" for the company in at least 3 of the last 5 years; and
- has received at least $450 in compensation from you during the year.
You may use less restrictive requirements to determine an eligible employee.
You may exclude (a)employees covered by a union agreement whose retirement benefits were bargained for in good faith by the employees' union and you; and (b) nonresident alien employees who have no U.S. source compensation from you.
Employees who meet the plan's eligibility requirements may not choose to be excluded from a SEP plan, and an employer must contribute for them.
Does SEP Plan participation affect IRA contributions?
Employees who participate in a SEP plan are considered "active participants" in an employer retirement plan. As such, the deductibility of their IRA contribution may or may not be affected, depending on their income. SEP plan participation does not, however, reduce or eliminate an employee's ability to fund an IRA, and all IRA earnings are tax-deferred, regardless of SEP plan participation. But more importantly, a SEP plan offers the advantage of a contribution which is potentially much larger than an IRA contribution.
*This information should not be construed as providing tax or legal advice. Please consult with your tax advisor or attorney regarding your individual situation.
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