SIMPLIFIED EMPLOYEE PENSION PLAN - SEP IRA
A SEP IRA is a retirement account designed for the small business or a self-employed individual who meets the qualifications. The employer makes tax-deductible contributions to the IRA of all eligible employees.
Year Maximum Compensation to Base Contribution Max Contribution 2006 25% of $220K $44K 2007 25% of $225K $45K
25% of $230K $46K
25% of $240K $49K
Covers All Eligible Employees
WHAT ARE THE QUALIFICATIONS?
Employer Contributions Limits
The employer can make annual contributions for himself/herself and eligible employees of 0-25% of compensation, based on the employer and employee’s W-2 income. If the employer is unincorporated, the employers contribution is then based on his/her net income after the SEP deduction.
The contribution deadline is the employer’s tax filing deadline PLUS EXTENSIONS.
The employer must contribute the exact same percentage of compensation for each employee as he does for himself/herself. There can be no discrimination. An employer may elect to pay 0% for everyone one year, but increase the compensation the next. It doesn't matter as long as everyone in the plan gets the same percentage each year.
Maximum Compensation Allowed To Base SEP Contribution:
See the table (p.1) for the maximum compensation eligible for SEP contributions.
The employer takes all contribution to employee plans as a deduction.
SETTING UP A SEP-IRA
Employer’s Requirements for Establishing the SEP-IRA:
SETTING UP A SEP-IRA (continued)
Employer’s Funding of the SEP-IRA
The employer has several options for funding the SEP-IRA for the benefit of employees:
It is necessary for each employee to set up the Traditional/SEP-IRA at the financial institution before SEP contributions can be contributed.
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All SEP contributions made on behalf of the employer and employees are 100% tax deductible to the employer. The SEP contributions are not affected by the “income phase out” rules of the other IRAs. SEP participants, both employer and employees, are considered “active participants” of a company sponsored retirement plan if a contribution is made on their behalf for that tax year. Therefore, contributions to a SEP in a tax year could effect the deduction of a Traditional IRA contribution of the employer and employees if their MAGI is too high for that tax year.
An employer can allow employees to have salary deductions deposited directly into a Traditional or Roth IRA. This does not affect the amount of the employer contribution. Because the employee is covered by a SEP, it will affect the deductibility of his/her Traditional contributions depending on the employees MAGI. (See Traditional IRA Education)
Employees are 100% vested as soon as the contributions are made and may withdraw the funds at anytime from the SEP-IRA. The amount withdrawn will be taxable to the employee. And, if the employee is under the age of 59 ½, IRS penalties and early withdrawal CD penalties will apply unless the employee meets one of the IRS approved exceptions (discussed in previous modules)
Contributions may be made until the company’s tax return filing due date, plus extensions.
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