SEP IRA

What is a SEP IRA?

A SEP IRA (Simplified Employer Pension Plan) is a retirement plan that benefits self employed individuals and small business owners. A SEP IRA allows a contribution of up to 25% of compensation up to a maximum of $46,000 for 2007 ($45,000 for 2007). SEP IRAs are 100% employer funded (employees do not contribute). Contributions into a SEP IRA are generally tax deductible and investment earnings in a SEP grow tax deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes. With a SEP, each eligible employee has their own separate SEP IRA which is then funded by the employer.

A SEP IRA may be a good option for employers who want to make high contributions to their own accounts and the accounts of partners or employees. A self employed individual with no employees other then a spouse may also want to consider an Individual 401k as well as a SEP IRA.SEP IRA Benefits

• High Contribution Limits
  Contributions to a SEP can be made between 0% to 25% of compensation up to $46,000 for 2008. For incorporated businesses, compensation is based on W-2 income and a SEP contribution can be made up to 25% of W-2 wages. For sole proprietors compensation is based on “adjusted earned income.” Adjusted earned income is determined by completing an IRS worksheet. Contributions of up to 20% of adjusted gross income can be made to a SEP IRA. Annual compensation of more than $230,000 in 2008 ($220,000 in 2007) cannot be taken into consideration for determining contributions.
  
  To determine the annual retirement contribution you could make based on your income use the SEP IRA calculator.
   
• Tax Deductible Contributions
  Within IRS limits, contributions into a SEP IRA are generally 100% tax deductible to the employer.  SEP IRA contributions are made by the employer into their own SEP as well as to the individual SEP account of each eligible employee.
   
• Tax Deferred Growth
  Interest earned in a SEP IRA grows tax-deferred. Dividends and investment earnings continue to grow without being taxed until you withdraw the assets. Withdrawals after age 591/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes. At age 70 1/2 Mandatory Required Distributions are required.
   
• Contribution Flexibility
  Contributions into a SEP are completely discretionary. The percentage of contribution can vary year to year depending on profitability.
   
• Low Cost and Easy Administration
  SEP IRA accounts are inexpensive, easy to setup and maintain and do not require annual IRS filings.
   
• Retirement Plan Consolidation
  Retirement plans can be rolled over and consolidated into a SEP. This includes Traditional IRAs, 401k Plans, Money Purchase Plans, Profit Sharing Plans, Defined Benefit Plans, 403b Plans and Rollover IRAs. A Roth IRA or retirement accounts that have after tax contributions can not be rolled over into a SEP IRA.

What is the deadline to establish and contribute to a SEP IRA?

Generally a SEP must be established and funded by the tax filing deadline of the individual if a sole proprietor or the business if incorporated. Generally, filing extensions extends the period for establishing and funding the plan. There is no upper age limit to establishing a SEP IRA.

Learn more about SEP IRA retirement plans

1. Click here to learn more about a SEP IRA with NO employees.
    
2. Click here to learn more about a SEP IRA with employees.

   Need Help or Advice?  |  Open a SEP IRA

Disclosures:

* The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.