SEP IRA

 

A Simplified Employee Pension Plan (SEP) combines the best features of a qualified plan with the simplicity of an IRA. It allows employers to make deductible retirement plan contributions by depositing the funds directly into separate IRAs that are owned and controlled by each participant in the plan.

Available For

•   A sole proprietor, partnership, nonprofit organization, or a corporation.

Main Characteristics

•  Contributions made by employer.

•  Contribution Limit — The lesser of 25% of compensation or $45,000 ($46,000 for 2008). The compensation cap is $225,000 for 2007 ($230,000 for 2008).

•  Salary Deferral Limit (known as a SAR-SEP account) — Employee deferral in combination with

employer contribution may not exceed 25% of compensation. (The deadline to establish new SAR-SEP plans was December 31, 1996.)

•   Eligible Employees — Includes those who have earned in excess of $500 three of the past five years and are at least 21 years old.

Advantages

•   Eliminates most of the paperwork and cost associated with conventional qualified retirement plans.

•   Contributions are tax-deductible for the employer and investment earnings are tax deferred for employees.

•  Exempt from Form 5500 filings.

•   Employer contributions are flexible and optional.

•  No restrictions on size of company or number of employees.

 Limitations

•  Most part-time employees cannot be excluded from eligibility.

•   Participants are immediately 100% vested in their SEP IRAs, having access to funds immediately. Distributions may be subject to penalty tax of 10% if participant is under age 59 1/2.

•   Restricted to a calendar year plan.