A SEP can be established by sole proprietors, partnerships and corporations, including S corporations.
The advantages of the SEP begin with the flexibility to vary employer contributions each year from 0% up to a maximum of 25% of compensation, with a maximum dollar contribution of $51,000 in 2013.
The percentage you contribute must be the same for all eligible employees, i.e., employees age 21 or older and who have worked for you in three of the last five years and have earned at least $550. Employees are immediately 100% vested in all contributions.
There are no plan filings with the IRS, making administration simple and low cost. You only need to complete Form 5305 SEP and retain for your own records. This form should be provided to all employees as they become eligible for participation.
Unlike other plans, a SEP may be established as late as the due date (including extensions) of your business’ tax filing (generally April 15th) for making contributions for the prior year.
A Menu of Options
Each eligible employee will be asked to establish his or her own SEP-IRA account and self-direct the investments within the account, relieving you of choosing a menu of investment options for the plan.The rules for accessing these funds are the same as those governing regular IRAs.
Distributions from SEP-IRA and traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.¹
Unlike the self-employed 401(k), which is only available to business owners with no employees, you cannot take a loan from your SEP assets. Distributions from 401(k) plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.¹
The SEP earns the “simplified” in its name and stands as an attractive choice for business owners looking to maximize contributions while minimizing their administrative responsibilities.
1. IRAs have exceptions to avoid the 10% withdrawal penalty, including death and disability.
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