Is an SEP IRA plan right for you?
A SEP Plan is a small business retirement plan that allows employees to save for their retirement. It is designed to give employers of companies with few or no employees an easy alternative to building for retirement. Any business may establish a SEP Retirement Plan. Knowing the SEP IRA Rules will help you decide if the SEP IRA plan is right for you!
What are the benefits of a SEP?
- SEP Contributions. An employer may make contributions to an employee’s Plan up to the lesser of 25% of compensation, or $49,000 for 2009 (and subject to annual cost-of-living adjustments for 2010 and thereafter).
- Tax Deductions. The above qualified contributions generally allow for tax deductions of contributed amounts.
- Tax Deferral. Tax deferral on all growth, income, dividends and interest while funds remain in the SEP account.
- Flexibility on Contributions. SEP IRA rules state that contributions do not have to be made every year. Also, amounts may be adjusted from year to year.
- SEP Contribution Deadlines. Contributions do not have to be made until tax filing date (including extensions) of the following year. A SEP Plan can be set up as late as the due date (including extensions) of the business’s income tax return for that year.
- SEP IRA’s are Extremely Easy to Set Up and Maintain. An online brokerage company such as the Vanguard Group or Fidelity offer paperwork and a little personal assistance as you go. (Disclaimer: I am in no way affiliated with either Vanguard or Fidelity and do not profit from either of these companies)
- SEP’s can be terminated at any time. The employer can stop funding the SEP IRA account once the plan is terminated.
- Portability. SEP funds may be rolled over into a traditional IRA, 401k, or a profit sharing plan. Note: Employers do not have to receive rollovers from a SEP IRA, even though the law allows for it.
“For More Information on SEP IRA Rules Visit www.irs.gov”
What are the Drawbacks of a SEP IRA?
- Potentially Large Contributions to Employees. This item is a drawback for employers, but a boon for employees. SEP plans require that contributions to employees’ SEP-IRA’s be proportional to their salary/wages. For example if an owner contributes 10% of his/her salary to their SEP account, he/she must make contributions at 10% for each employee as well.
- Catch-Up Contributions are not Allowed for SEP’s.
- Taxable upon Withdrawal. Like all “pre-tax” retirement plans, qualified distributions after the age of 59.5 are taxed at ordinary income tax rates.
- Early Withdrawals are Penalized. SEP IRA’s early withdrawals are not only taxed, they are also subject to a 10% penalty with the following exceptions. Keep in mind that the ordinary income tax may not be excused if one of the following exceptions applies….only the penalty.
- Certain Unreimbursed Medical Expenses.
- Certain Medical Insurance Payments.
- Withdrawals as Part of a SEPP Program. SEPP stands for “substantially equal periodic payments”. The payments must last five years or until the IRA owner reaches age 59.5 – whichever is longer – and the payments must also follow certain IRS-approved processes.
- Certain Qualified Higher Education Expenses.
- Certain First-Time Homebuyers Costs.
Remember employees, SEP IRA’s are only accounts. They are not the investment themselves. The investments will be held inside the SEP IRA accounts.
SEP IRA rules, like traditional IRA rules, state that SEP accounts may not hold collectibles such as artwork, antiques, rugs, gems, metals, stamps, coins and other tangible personal property.
If your SEP Retirement Plan invests in collectibles, the amount invested is considered distributed to you in the year invested.