Rules For Simplified Employee Pension Plans Better Known As A Sep Plans

A SEP is a special type of IRA. Under a SEP plan the employer creates an IRA account for each eligible employee, hence the name SEP-IRA. A SEP is funded solely with employer contributions. Employees do not make contributions to their SEP-IRA retirement account. Any money that goes into a SEP automatically belongs to the employee. Thus, the employee has the right to take his SEP IRA account money with him whenever he stops working for the company. Any size business can establish a SEP, but the SEP retirement plan is utilized mostly by the self-employed and the small business with few employees. The SEP IRA rules dictate that if the business contributes for one employee, (i.e., the owner), then the business must contribute proportionately for all of the employees. With few exceptions, anyone who works for the business must be included in the SEP. However, you can exclude from participating in the SEP plan anyone who: . Has not worked for the company during three out of the last five years. . Has not reached age during the year for which contributions are made. . Received less than $ in compensation (subject to cost-of-living adjustments) during the year. SEP IRA contributions to each employee for cannot exceed the lesser of $, or % of pay for W recipients (% of income for sole proprietors). The SEP IRA contribution limit goes up to $, for , and is subject to cost-of-living adjustments for later years. SEP-IRA rules do not provide for additional catch-up contributions for those years old or over. A growing number of self-employed individuals with no employees are abandoning the SEP-IRA for a newer type of retirement plan called the Solo (k) or Self-Employed (k). The two main reasons for the switch are ) they can generally contribute much more to a Solo (k) than they can under a SEP IRA, and ) Loans are allowed under a Solo (k), whereas loans are prohibited under a SEP-IRA. Example: Henry, age , a realtor received $, in compensation from self-employment income in . For , he could contribute a maximum of $, in a Solo (k) versus a maximum of $, under a SEP IRA. However, the Solo (k) does not work for businesses with employees. Thus, if your company plans to hire employees or has a handful of employees, the SEP IRA may be your best choice as a retirement plan that is inexpensive and simple to operate.