SEP IRA Plans

What is a SEP IRA?

Retirement plans are important for most everyone. A SEP plan offers the self-employed or small business owner another option to save for retirement.

A SEP is a Simplified Employee Pension Plan is a retirement plan whereby an employer makes contributions on behalf of their employees. It is basically an IRA, with a few differences. Annual contributions into the employee's account may fluctuate, based on the employers profit each year.

SEP Plans are ideal for self-employed people and small business owners, because they are relatively easy and inexpensive to establish and to administer. The SEP is intended to be an attractive alternative to tax qualified retirement plans which are subject to ERISA rules.

SEP IRA Employer Contributions

With a SEP plan, the employer contributes toward its employees retirement savings while enjoying the benefit of reduced federal income taxes. Such tax savings can in turn be viewed as helping to fund the plan. An employer is eligible to take a federal income tax deduction under IRC Section 404(h) for amounts contributed to a SEP plan, which make these plans attractive to employers.

Establishing a SEP IRA Plan: To begin a SEP IRA plan, the only required forms are a pre-approved IRS 5305-SEP form and an IRA application for each participant. Maintenance: SEP IRAs require no initial or annual required filings. Cost: Only an annual custodial fee of $15 per account per participant up to a maximum of $30 per year.
Employer Contributions: Contributions can vary from year to year or even skipped occasionally. Employee Contributions: Employees are not permitted to make contributions but can decide to invest employer contributions.

More about SEP Plans

With a SEP plan, the employer or the self-employed individual contributes directly to the employees IRA account.
Participants do not need a separate SEP account if they already have an established IRA.

SEPs do not require complicated documentation, administration or annual tax reporting, relieving the employer of the expenses of a normal pension plan.

SEPs are great for small businesses, and are available for the self-employed (including anyone with a part-time business), sole proprietorships, S and C corporations and partnerships.

An employer can contribute up to 25% of an employees annual compensation, not to exceed $40,000.
In the case of self-employed individuals, compensation is considered to be income reported on schedule C of their tax returns.
In addition, direct employer contributions to a SEP are not subject to Social Security (FICA) or Federal Unemployment (FUTA) taxes.

Annual contributions by an employer are not mandatory and can be made when desired.
All of the contributions go into the participants IRA, and the participant is immediately 100% vested in the contribution.
This allows participants complete control over the investments, just as they would have in a regular participant IRA.

An employer-sponsored SEP plan cannot discriminate between employees.
Contribution percentages must be uniform in their relationship to the compensation of each employee.
In cases where there is a large disparity in compensation, a SEP plan may be integrated with a Social Security wage base.
This will allow workers who make more than the wage base to end up with a larger contribution.

Withdrawals from a SEP are taxed just like an IRA, with participants paying ordinary income taxes plus a 10% penalty if distributions are taken before age 59 .
While loans are not permitted from a SEP, the account owner may make a qualified 60-day withdrawal and rollover once each year without incurring taxation or interest charges.

Employers wishing to set up a SEP for this year do not have to complete paperwork or make the contribution until they file their 2003 taxes (plus any extensions).
Another important feature for employers contemplating establishment of a SEP is that employees do not have to be covered by the plan until they have worked three years.
Employees covered by collective bargaining agreements and non-resident aliens are also exempt from coverage.

Investment choices in a SEP are very flexible. A SEP participant may purchase any investment allowed in an IRA.
Unlike qualified pension plans that limit in-service withdrawals, a SEP allows the owners the right to withdraw the money immediately, subject to taxes and early withdrawal penalties.
They may also convert the IRA into a Roth IRA, paying taxes for the amount converted.

SEPs are an ideal pension savings plan for smaller businesses (generally with around 10 or fewer employees) because of the flexibility afforded the employer in timing and amounts of contribution, ease of use, reduced administration expenses and the fact that there is no limit to the number of employees that a SEP plan may cover.

For more information or to have us answer any questions you may have, please call 1-800-559-2900, or email Atlantic Financial, or contact us

Also See: Rollover IRAs| Roth IRAs| SEP IRAs| Traditional IRAs| 529