How to Contribute to a SEP IRA

A simplified employee pension plan (SEP) allows for small business owners and self-employed individuals to provide retirement income for themselves and their employees. A SEP IRA is an individual retirement account into which an employer can contribute up to a quarter of an employee's yearly salary.

Difficulty: Easy

Instructions

1. Determine the advantages of a SEP IRA as opposed to a pension fund. A SEP IRA doesn't incur any operating costs, nor are the investment earnings taxed. In fact, you may be eligible for a tax credit the first few years of having the fund.

2. Establish a SEP IRA for yourself and/or your employees. A SEP IRA is specifically designed for very small businesses or those who are self-employed. You can open a SEP for yourself if you can declare income from being self-employed.

3. Contribute up to 25 percent of an employee's yearly compensation or up to the maximum limit set by the IRS. In this instance, compensation includes not only regular salary but also bonuses and overtime. While you don't need to contribute to the plan every year, in every year you do contribute you must do so for all eligible employees.

4. Make contributions before the due date of your tax return and report them in the calendar year in which they are made. Since some types of companies' taxes aren't due until approximately 10 weeks after the taxable year ends, and contributions are reported by calendar year, it's possible to report 2 tax years of contributions on one form.

5. Provide disclosure statements to your employees. Even though they are not allowed to contribute to their own SEP IRAs, you must inform them of the amount of contribution on their behalves by your company.

Tips & Warnings

• Even if you participate in another retirement plan through another employer, you may still set up a SEP IRA for your business and your employees.
• You are not required to make yearly contributions to your employees' SEP IRAs, which is particularly useful for those just starting up a small business without a lot of capital.
• If you are an independent consultant or the sole proprietor of a business, you may open a SEP on your own behalf. You may also open them on the behalf of any eligible employees, defined as someone being 21 years or older and who has worked for you at least 3 of the past 5 years.