What are SEP IRA Plans?
SEP IRA plans are for Individuals who own their own business so they have the capability to fund own type of retirement plan containing different features and benefits. While SEP IRA’s have their major advantages, there are several differences that you need to be aware of.
A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a variation of the Individual Retirement Account. SEP IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. There are no significant administration costs for self-employed person with no employees. If the self-employed person does have employees, all employees must receive the same benefits under an SEP plan. Since SEP accounts are treated as IRAs, funds can be invested the same way as any other IRA.
Another issue to consider is whether you’d like to have the option of borrowing against your retirement plan by using your retirement plan's balance as collateral and receive an Individual 401k loan. IRS rules do not permit a loan in a SEP IRA, but an Individual 401k loan of up to half of the plan's value up to a $50,000 maximum is allowed.
SEP IRA Features
Features: In 2009 there is $49,000 maximum contribution.
Advantages: Easy to setup and low administrative responsibilities.
Disadvantages: An Individual 401k may provide a larger contribution and tax deduction compared to a SEP IRA. For those age 50+ there isn't an additional $5500 catch-up contribution provision like there is with the Individual 401k.
Who would be appropriate for a SEP IRA?
Simply, the SEP IRA is a great choice for self employed individuals or owner and spouse businesses who would like to contribute up to 25% of their W-2 earnings or 20% of net self employment income up to the SEP IRA contribution limit. A SEP provides high maximum contribution limits, but an Individual 401k may allow a greater contribution at the same income level.
A final point to consider is IRS rules do not permit loans with a SEP IRA. A SEP IRA is the right choice if you aren't in need of a loan and don't anticipate needing one in the future.
It is important to note that you can set up a SEP IRA and convert to an Individual 401k in the future if you change your mind and either want to receive an Individual 401k loan or if you want to contribute more than the calculations of a SEP IRA will allow. Converting from a SEP IRA to an Individual 401k and transferring retirement assets from a SEP IRA to a new Individual 401k can be accomplished by completing some minor administrative paper work.
SEP IRA Advantages
Contributions to a SEP are tax deductible and your business pays no taxes on the earnings on the investments.
You are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs.
Generally, you do not have to file any documents with the government.
Sole proprietors, partnerships, and corporations, including S corporations, can set up SEPs.
You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting the plan.
Administrative costs are low.
SEP IRA Account review and recap:
Generally, any employee who is at least 21, earns at least $500 per year, and has worked three out of the five preceding years is eligible to participate in the SEP.
Any employer with one or more employees may establish an SEP plan. This includes sole proprietorships, partnerships, corporations and non-profit organizations.
An attractive feature of the SEP plan is that employees may use the same account to which SEP contributions are made for their regular Traditional IRA contributions.
Contributions to SEP IRAs are immediately 100% vested, which means employees may take the contributions at any time, regardless of whether or not the employee still works for the employer's business.
Because the funding vehicle for a SEP is a Traditional IRA, the distribution rules of a Traditional IRA also apply to SEP assets.
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