SEP IRA

A SEP IRA is a Simplified Employee Pension retirement plan that offers employers an easy way to make contributions towards an employee retirement program. If self-employed, it allows for a personal retirement plan. Contributions are made directly to an Individual Retirement Account (IRA) or Annuity set up for each individual employee. The SEP is a simplified IRA, even more so than the SIMPLE IRA. There are no administrative costs if you are self-employed and don't have employees. If you are self employed and you do have employees, all employees must receive equal benefits under a SEP plan. Since SEP accounts are treated as an IRA, funds can be invested like any other type of IRA. The SEP IRA is owned and managed by the employee and the employer sends the SEP contributions to the financial institution where the account is maintained. The account can be set up to an individual’s business even if he/she participates in another employer's retirement plan.

Do you need help setting up a SEP retirement plan for your employees? Contact a skilled CPA for help setting up your SEP today.

There are three basic steps in setting up a SEP IRA:

• A formal written contract must be implemented. This contract may be satisfied by adopting an IRS model SEP, a prototype SEP or an individually designed SEP.
• Every eligible employee must be given specific information regarding the SEP.
• An individual SEP IRA must be set up for every eligible employee with a bank, insurance company, or other qualified financial institution.

The employees must meet the following criteria:

• Must be at least 21 years old.
• Must have worked for the employer for at least three out of the previous five years.
• Must have received at least the minimum compensation for that tax year.

SEP IRA contributions are seen as a profit-sharing plan. For employees, an employer may contribute up to 25 percent of each employee's wages to their SEP IRA account. The total contribution to a SEP IRA account is either 25 percent of the income or a pre-set total for each year, the amount is indexed for inflation, whichever is smaller. For self-employed people the amount is 20 percent before the self-employed tax credit is added. The maximum deduction is 25 percent of all members’ compensation. Limits apply collectively to the contributions an employer makes for its employees to all the defined contribution programs, which includes SEPs and are specific for each year. They are subject to annual cost-of-living adjustments. If an employer contributes to another defined contribution plan for its employees like, a 401(k), a yearly addition limit may apply. Contributions are not mandatory to be made each year, but in the years when contributions are made, they must be made to the SEP IRAs of all eligible employees. SEP- retirement plan funds are taxed at ordinary income tax rates when qualified withdrawals are taken after age 59.5. Contributions to a SEP plan are tax deductible and will lower a taxpayer's income tax liability for that year. Contributions to an employee’s SEP IRA are not included in their gross income, except for excess contributions. Excess contribution and earnings on the excess contribution amounts are subject to a 6 percent excise tax unless they are withdrawn before the due date for filing their next tax return.

Do you need help setting up a SEP retirement plan for your employees? Contact a skilled CPA for help setting up your SEP today.