SEP IRA is Simplified Employee Pension Individual Retirement Arrangement is a retirement investment plan for business owners and their employees. The business owner makes a contribution to this account for the employees and also to their own accounts. These contributions as well as the returns are not taxable for the employee as well as the owner. The SEP is discreet and the employer can choose to contribute for the employee for that year based on the company’s performance.
A good SEP- IRA plan should have:
- A good finance department
- SEP – IRA formal agreements
- Information to the employees on their SEP- IRA
- Depositing contributions
- Monitoring the plan.
- It is available for the employees as well as the business owner.
- The business owner makes the SEP contribution to the employees traditional IRA and it becomes SEP IRA.
- Business owners can contribute to their own SEP IRA even if they are the only employee of the company.
- Individual employees cannot form the SEP IRA account but can have the employer make the SEP contribution to their traditional IRA account.
- Employees age should be 21 and above
- Has been employed for a minimum of 3 years in the last 5 years
- All employees must be included (Part time, seasonal, terminated that year and passed away that year)
- Earns a minimum of $500 a year.
Setting up an SEP IRA:
- Written agreement: A written agreement by the employer has to be made and submitted before the end of the financial year. Form 5305-SEP a SEP document designed by the financial institutions can be used or the company’s own agreement is sufficient.
- Provide SEP details to the employees: Details of the SEP plans, rules, eligibility, disclosure agreement, annual statement, company’s financial statement and a copy of the agreement are to be provided to the employees.
- Contribution limit: Upto 25% of the employee’s salary can be contributed towards the SEP. The contribution can be of 3 types:
- Pro- Rata: Each employee receives the same percentage of their individual eligible compensation.
- Flat –Dollar: Each employee gets the same dollar amount.
- Social Security Integration: The employer allots a percentage of contribution to each employee based on their pay scale. Higher paid employee gets higher percentage of the contribution.
- Loans cannot be availed from the SEP-IRA’s.
- Withdrawals can be made at any time although they are taxable. Withdrawal from SEP- IRA by an employee before the age of 59.5 years attracts additional 10% tax.
- Individuals should make fixed withdrawals from the SEP-IRA in the year following the year they turn 70.5 years.
- From this, the individual continues to make additional amount withdrawals annually.
Monitoring the plan and making sure that the contributions are made before the time of filing taxes. New employees are to be added to the plan. Re-adjust the contributions based on the performance of the employee and the company.