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| SEP IRA |  A simplified employee pension plan (SEP) is a deferred-compensation agreement which is similar to a profit-sharing plan. SEP can be made by employers and self-employed individuals, as well as single proprietorships and partnerships. Employers get tax benefits for plan contributions made to employees’ accounts, and employees do not pay taxes on SEP contributions until they start to take distributions in retirement. Therefore, SEPs are attractive to both the employer and the employee.
There are many companies that introduce SEPs consent to contribute on a basis to IRAs maintained by employees. Employers have to provide benefits to all employees who are eligible. Eligible employees are those who are 21 and more years old, earn at least $500 each year (indexed for inflation), and have been working for the company for three out of the five years before to the year for which the contribution is being made. By the way, employers have a right to choose eligibility requirements that are less limiting, but these requirements must be applied to every employee.
Employer contributions can not be lesser than $45,000 or 25% of an employee’s compensation (in 2007). As a rule, contributions are made on a discretionary basis. That means that the employer can decide by his own each year whether or not to contribute, as well as how much to contribute.
SEP contributions are made in order to separate IRAs for eligible employees. Employees are responsible for making their own traditional IRAs to get employer contributions, which are immediately 100% vested, and employees direct their own account investments.
When sharers begin to receive distributions from a SEP IRA, the regulations are the same as in case of a traditional IRA. Distributions are taxed as ordinary income. They cannot be taken before the age of 59½ without incurring a 10% federal income tax penalty, but this doesn’t regard the case of extenuating circumstances. SEP IRA account possessors must begin taking minimum distributions after reaching age 70½.
SEP IRA may be good option for small-business owners or for self-employed people. This is because contributions may be tax deductible. Besides, this type of plan is easy to establish and administer. Employees of a company that offers a SEP IRA, can profit by the potential to get employer-paid contributions. Business owners should always discuss their retirement plan options with a financial professional before deciding on a method.
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