SEP IRA Rules and FAQs
What is a SEP IRA?
A SEP IRA (Simplified Employee Pension) is a retirement plan that is popular with many small business owners and self employed individuals. A SEP IRA allows contributions of up to $51,000 for 2013 ($50,000 for 2012).
Who is eligible for a SEP IRA?
Sole proprietors, partnerships, incorporated and unincorporated small businesses including Sub S corporations and individuals with self employment income even if they are covered by their employers retirement plan such as a 401k, 403b or 457 plan.
Who is best suited for a SEP IRA?
Employers who wish to make large tax deductible retirement plan contributions both for themselves and on behalf of their employees (who therefore receive a substantial tax free fringe benefit). This could be beneficial in attracting or retaining key employees in a competitive labor market.
Another desirable situation is a person with a sideline business with self employment income in addition to a main job which provides a retirement plan such as a 401k. Contributions can be made to a SEP IRA with self employment income even if you participate in a 401k, 403b, or 457. This is good for such individuals if their desire is to save for retirement while saving current taxes.
How are SEP IRA contributions calculated?
The employer decides at what level the plan will be funded, from 0% to 25% of compensation (0%-20% for unincorporated businesses). The % must be the same for the employer as for the employees. Each employee has his/her own SEP account and the employer pays the entire contribution. The employee receives this fringe benefit tax free and it's tax deductible for the employer. Contributions to a SEP is optional each year so years can be skipped if finances dictate or implemented if profits exceed a certain threshold as an incentive to employees. Therefore a SEP IRA offers maximum flexibility. Because a SEP IRA is so generous to employees it may engender employee loyalty and minimize turnover.
Which employees must be included in the plan?
All employees age 21 or older who earned $550 or more during the current year if they have worked for the business in 3 of the past 5 years must be included in a SEP IRA plan.
When is the deadline for a SEP IRA to be established and funded?
Sole proprietorship, partnership or a LLC taxed as a sole proprietorship:
- A SEP IRA must be established and funded by the individual's personal tax filing deadline, generally April 15th (or October 15 if an extension was filed).
S or C corporation or a LLC taxed as a corporation:
- A SEP must be established and funded by the corporate tax filing deadline, generally March 15th (plus extensions).
When may the funds be withdrawn?
As with other retirement plans, the SEP IRA allows withdrawals at age 59 1/2 and requires distributions at age 70 1/2. Distributions before age 59 1/2 usually incur taxes and penalties with some exceptions such as medical or educational expenses or the purchase of a home. Consult with your tax advisor to determine if you may qualify for those exceptions.