SEP-IRA is a retirement plan for self-employed and small business owners. It is simple to start and administer, with flexible contributions and tax-deferred money. Eligible employees must be at least 21 years old and have served for three of the last five years. The plan can roll over to other qualified retirement plans and withdrawals are allowed.
A SEP-IRA (Employee Individual Retirement Account) or Simplified Employee Pension Plan, is a retirement plan available to the self-employed and small business owners. Those eligible to establish a SEP-IRA are sole proprietors, those in partnerships, and business owners of unincorporated or incorporated companies, including S corporations. The owner must earn self-employment income by performing a service.
A SEP-IRA is, in a word, simple. The start-up and administration of the plan are less expensive than with traditional pension plans. There is relatively little paperwork to complete, and annual reports to the IRS are not required. The deadline to start and contribute to a SEP-IRA plan is the company’s 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 As with most retirement plans, the money is tax-deferred until it is withdrawn.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 contributed by the employer can fluctuate each year as long as it is the same for each employee. Up to 25% of an employee’s compensation is allowed for tax benefit, up to US$44,000 for 2006. The maximum contribution, on which the employer contribution is based, is US$220,000 in 2006.
There are few requirements that stipulate who is an eligible employee. An eligible employee must be at least 21 years old and must have served for at least three of the last five years. All eligible employees must participate, including part-time and seasonal employees. Employees who do not have to be included in the plan are: those covered by a union contract, nonresident aliens, and those who have earned less than $450 during the year.
A SEP-IRA can roll over to another SEP-IRA, a traditional IRA, or another qualified retirement plan that allows rollovers. An employee cannot borrow 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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