A SEP-IRA is a pension plan that is designed primarily for smaller employers who want to provide a tax-deferred retirement plan benefit to their employees. With a SEP-IRA, contributions to the retirement plan are made by the employer.
For employers, a SEP-IRA offers the following advantages:
- Contribution limits far exceed those for IRAs
- All contributions can be deducted from the company's current earnings
- The employer can determine on an annual basis how much to contribute to the plan.
- There is no requirement to file an annual report with the IRS, as there is with a traditional Keogh plan.
Employees can benefit because:
- A SEP offers an opportunity to have more money put away for retirement
- All contributions are considered to be pre-tax dollars
- Every dollar invested in the plan in the name of an employee belongs to that person immediately. There is no vesting period.
- Once leaving the employer, the money can be rolled directly into an IRA to maintain the tax-deferred benefit.
Contribution limits
The maximum that can be contributed to an individual's SEP-IRA account each
year is 15% of the employee's income up to a maximum contribution of $30,000
per employee.
Requirements of a SEP-IRA
- Contributions must be of an equal percentage of income for all employees.
- A SEP-IRA can be funded up to the point when the company's taxes are due for the year, including all tax filing extensions.
- Money in a SEP-IRA cannot be rolled over into another employer's retirement plan.
A note for self-employed individuals
If you are self-employed, a SEP-IRA can be a good option, but be sure to notice that the calculation for determining your maximum contribution is reduced from 15% to 13.0435%, essentially accounting for half of the self-employment tax you pay to the Federal government.
Start on your path today
To take a step towards a comfortable retirement, please contact your Protective representative today.
