A SEP-IRA is a retirement plan for self-employed and small business owners. It is simple, flexible, and tax-deferred. Eligible employees must be at least 21 years old and have served three of the last five years. Contributions are up to 25% of an employee’s pay, up to $44,000 in 2006. It can be rolled over into another retirement plan and withdrawals are subject to income tax.
A SEP-IRA (Simplified Employee Pension-Individual Retirement Account) or Simplified Employee Pension plan, is a retirement plan available to the self-employed and small business owners. Eligible for creating a SEP-IRA are sole proprietors, partnerships, and owners of unincorporated or incorporated businesses, including S corporations. The owner must be earning self-employment income by providing a service.
A SEP-IRA is, in a word, simple. The plan is less expensive to start and administer than traditional retirement plans. There is relatively little paperwork to fill out and no annual reports are required for the IRS. The deadline to start and contribute to a SEP-IRA plan is the business tax filing deadline, which is typically April 15.
The benefits of a SEP-IRA plan go beyond its simplicity. As with most retirement plans, the money is tax-deferred until it is withdrawn. Contributions are flexible and do not have to be made every year.
The percentage paid by the employer may vary each year as long as it is the same for every employee. Up to 25% of an employee’s pay is eligible for the tax benefit, up to US$44,000 (USD) for 2006. The maximum contribution, upon which the employer contribution is based, is US$220,000 in 2006.
There are few requirements that dictate who is an eligible employee. An eligible employee must be at least 21 years of age and must have served at least three of the last five years. All eligible employees must participate, including part-time and seasonal employees. Employees who should not be included in the plan are: those covered by a union contract, nonresident aliens, and those who earned less than $450 during the year.
A SEP-IRA can be rolled over into another SEP-IRA, a Traditional IRA, or another Qualifying Retirement Plan that allows for rollovers. An employee cannot apply for a loan from a SEP-IRA, but can make withdrawals. Of course, as with other retirement plans, the withdrawal is subject to income tax for the year it was distributed, but the penalties are relatively low.
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