SEP-IRA:
The In And Out

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SEP-IRA Defined

SEP-IRA can be defined as Simplified Employee Pension (SEP) that allows you to make contributions to an Individual Retirement Account (IRA) on behalf of yourself or your employees. It is a hassle-free retirement option for self-employed people or those with a few employees. In a SEP-IRA plan, contributions and the investment earnings can grow tax-deferred until withdrawal, which is assumed to be at retirement, at which time they are taxed as ordinary income.

Why SEP-IRA is Sought-after?

SEP-IRAs are popular with self-employed people because they are simple and involve quick and less paperwork. Unlike Keogh plans, which have an annual reporting requirement, SEPs don't require annual reporting as long as each participant gets a copy of the plan agreement. The SEP is an IRA-based plan to which employers may make tax-deductible contributions on behalf of eligible employees. Each employee controls his or her own SEP-IRA account, and you send contributions to the bank, insurance company, or other financial institution where the employee's SEP-IRA is held. The employer is allowed a tax deduction for plan contributions, which are made to each eligible employees' SEP IRA on a discretionary basis.

SEP-IRA Rules

Usually the funding for SEP is traditional IRA, and SEP contributions deposited, become IRA assets and need to be within the limits of the IRA rules specified:

• Distribution rules for traditional IRA
• Investment rules
• Contribution rules applicable to traditional IRA, which are applicable to the employee’s regular IRA contributions (excluding the SEP-employer contribution)
• Papers required for establishing the IRA, including the documents for SEP establishment. The documents should adhere to the guidelines in the Traditional IRA

Who Can Establish a SEP-IRA?

• Any sole proprietor, in a partnership, or a business owner can establish a SEP-IRA. Either an unincorporated or incorporated business, including Subchapter S corporations.
• Any self-employed income earner (by providing a service), either full-time or part-time, even if you are already covered by a retirement plan at your full-time job can also establish a SEP-IRA.

Small business owners have a number of retirement plan options to choose from, including SEP-IRA, SIMPLE-IRA and 401(k) Plans.

Plans generally funded by employer contributions such as SEP-IRAs are where the business contributes the same percentage of compensation for you and any eligible employees you may have.

Plans generally funded by employee elective deferrals and employer contributions such as SIMPLE-IRA and 401(k) Plans are where employees have an opportunity to defer part of their salary to fund their retirement plans on a tax-beneficial basis.

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