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IRA
Simplified Employee Pension IRA (SEP) |
A Simplified Employee
Pension IRA, or SEP-IRA, is a tax-deferred retirement plan designed for small business
owners (25 employees or less) or other self-employed individuals. With this plan, employers
make contributions to an employee's retirement -- up to 15% of an employee's
total income (not to exceed $24,000 per year). Contributions are deducted from taxable
income which allows employees to save both state and federal taxes.
SEP-IRAs are attractive because they require little paperwork to set up, are easier to
administer, and have minimal disclosure requirements. But one of the biggest advantages a
SEP-IRA has over a traditional IRA is the higher contribution limit. The maximum 15% of an
employee's income will usually be greater than the $2,000 limit of a traditional IRA. And
even if you have a SEP-IRA at work, you're still allowed to contribute to a regular IRA on
your own.
Contributions
Contributions to a SEP-IRA are subject to the same rules as a regular IRA -- except for
the higher contribution limits. And like other IRAs, you're allowed to spread your SEP
among different types of investments.
Withdrawals
Pre-tax contributions and earnings in a SEP-IRA are tax-deferred until you begin
withdrawals -- at which time they are taxed as ordinary income. Distribution is required
at age 70 1/2 or retirement.
Advantages
- Easy to set up. Considerably
less expensive.
- Reporting of the plan is
minimal. Less disclosure.
- Administration of the plan
is easier.
- Regular IRAs are still
available to employees.
- Contributions and earnings
grow tax-deferred just like a regular IRA.
Disadvantages
- Employers may vary the
percentage of their contribution based on the employees years of service.
- Depending on your position
and length of service with the company, you may or may not be eligible for a SEP-IRA.
"No
Brainer"
Whether you're self-employed or work for a smaller organization (25 employees or less), a
SEP-IRA will give you the added boost for your retirement plan. It offers the best of both
worlds: tax-deferral and larger contributions. If you're lucky enough to have an employer
that cares about your future, starting a SEP-IRA is a "no brainer".
IRA Calculators:
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• What
amount am I allowed to contribute?
• Should I convert my IRA
into a Roth IRA?
• Which will
provide the most retirement income?
• What
option is best for estate planning? |
