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Retirement Planning
Simplified Employee Pension Plan
(SEP-IRA)


A SEP-IRA is a tax-deferred retirement plan provided by sole proprietors or small businesses. This plan lets employers establish retirement plans, either for themselves or their employees eliminating virtually all the paper work complexity found in some retirement plans such as the 401(k).

Eligibility

Generally all employees are eligible, though the employer MAY exclude:
  • employees under age 21

  • employees who have not worked at least three of the prior five years of certain union or nonresident alien employees

  • employees not earning the minimum annual amount (Indexed at $450)

Contributions
Only employers can make contributions to SEP-IRAs. The contributions can be up to 20% of each employee's total compensation, with a maximum contribution of $42,000.

OR

A fixed dollar amount for all employees. Some employees can receive a higher "weighted" contribution to compensate for the fact that social security disproportionately favors less highly-paid employees.

Deductibility
SEP Plan contributions for the business owner and employees are tax deductible.

Withdrawals
Distributions (withdrawals) are taxed as ordinary income under the Traditional IRA rules.

Employess with SEP-IRAs can also invest in regular IRAs

Employer contributions to a SEP-IRA do not preclude you from investing in an IRA of your own. However, the deductibility of your IRA contribution may be affected, depending on your income. The main advantages of the SEP is the possibility for a contribution that is much larger than an IRA contribution. In addition, all IRAs earnings are tax-deferred, regardless of SEP plan participation.

 
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