What are SEP IRAs?
A simplified employee pension plan (SEP) is a deferred-compensation arrangement that is similar to a profit-sharing plan. It can be set up by employers and self-employed individuals, as well as sole proprietorships and partnerships. Employers receive tax deductions for plan contributions made to employees’ accounts, and employees do not pay taxes on SEP contributions until they begin taking distributions in retirement. Thus, SEPs can be attractive to both the employer and the employee. Companies that institute SEPs agree to contribute on a nondiscriminatory basis to IRAs maintained by employees. Employers are required to provide benefits to all employees who are eligible. Employees are eligible if they are at least 21 years old, earn at least $500 each year (indexed for inflation), and have been employed by the company for three out of the five years prior to the year for which the contribution is being made. Employers also have the option of selecting eligibility requirements that are
One of the several types of retirement accounts used in the United States is the Simplified Employee Pension Individual Retirement Account (SEP IRA). SEP IRAs are designed to specifically benefit small business owners and self-employed individuals. The main advantage to SEP IRAs is that there are little or no administration costs associated with these accounts. When a self-employed person contributes to his SEP IRA, there is a certain dollar amount — which can change depending on the tax year — that he is allowed to put in. The restrictions on self-employed individuals are generally stricter than those on small business owners. The owner of a small business can contribute up to 25% of each employee’s pay to an SEP IRA for each employee. Whatever the level of contribution in a given tax year, it must be the same for all employees. SEP IRAs have no start-up costs and generally do not require the filing of forms with the government. To be eligible to participate, an employee must be at
A simplified employee pension plan (SEP) is a deferred-compensation arrangement that is similar to a profit-sharing plan. It can be set up by employers and self-employed individuals, as well as sole proprietorships and partnerships. Employers receive tax deductions for plan contributions made to employees accounts, and employees do not pay taxes on SEP contributions until they begin taking distributions in retirement. Thus, SEPs can be attractive to both the employer and the employee. Companies that institute SEPs agree to contribute on a nondiscriminatory basis to IRAs maintained by employees. Employers are required to provide benefits to all employees who are eligible. Employees are eligible if they are at least 21 years old, earn at least $500 each year (indexed for inflation), and have been employed by the company for three out of the five years prior to the year for which the contribution is being made. Employers also have the option of selecting eligibility requirements that are
