What Is a SEP IRA Account?
A simplified employee pension plan, or SEP, is a plan in which employers may contribute to the retirement accounts of their employees. SEP-IRA accounts are set up for individual employees, and each employee controls his own account. If you are self-employed, you may set up a SEP-IRA for yourself.
Other People Are Reading
-
Initial SEP-IRA Setup
-
Employers must execute an agreement using IRS Form 5305-SEP (or approved facsimile) to initiate a SEP-IRA. Employers agree to provide SEP accounts for all eligible employees and supply workers with details about the SEP program. Employers may set up SEP-IRAs any time during the tax year up until the due date of the employer's tax return.
Contributions
-
If you are an employer, you are not required to contribute to employee SEPs every year. However, if you do contribute, you must supply funds to each eligible employee's SEP-IRA account. Contributions must be made in cash or by check or money order. You may not contribute property to a SEP-IRA, though you may transfer or roll over property from one SEP to another in some cases.
-
Restrictions
-
For 2009, you may contribute up to 25 percent of an employee's annual compensation, or a maximum of $49,000 per year, whichever is less. You may contribute similar amounts to your own SEP-IRA. Employers may deduct contributions they make to their employees' SEP-IRAs. Self-employed workers may also deduct contributions to their SEP-IRAs, but they must calculate the deduction using special rate tables supplied by the IRS.
Benefits
-
When you participate in a SEP-IRA plan, you are not restricted from establishing and contributing to a Roth IRA. Self-employed individuals may set up a SEP-IRA even if they participate in another retirement plan at another place of business. Your employer can set up and contribute to a SEP-IRA for you even if you are unable to contribute. Employer contributions are not considered taxable income to employees.
Considerations
-
If an employer or employee makes excess contributions to a SEP-IRA, they may incur a tax penalty of between 6 percent and 10 percent of the excess contribution. Generally, you must start taking withdrawals from your SEP-IRA beginning in the calendar year after you turn 70 1/2 years old. Employers may terminate SEP-IRAs at any time by notifying employees and the financial institution handling the SEP plan that contributions will discontinue. The SEP accounts may remain at the financial institution after the plan terminates.
-
