What is a SEP IRA?

A SEP IRA, Simplified Employee Pension, is a retirement plan to which employers can make tax-deductible contributions on behalf of eligible employees, including the owner.

Who Can Establish a SEP IRA?

Any employer with one or more employees can create a SEP plan for their business. This includes self-employed business owners. SEP IRA plans work for sole proprietorship’s, partnerships, corporations, and nonprofit organizations. Any employee who is over the age of 21 and earns at least $550 per year and has worked three out of the past five years for the employer is eligible to participate in the SEP plan.

What are some unique attributes of SEP IRAs?

SEP plans are easy to administer and the costs associated with creating and maintaining SEPs are low compared to 401(k) plans and other qualified employer retirement plans. Contributions are discretionary, allowing the employer to decide each year if they want to fund the SEP for that given year. Contributions to SEP IRAs are immediately vested. This means that employees have access to the funds at any time, regardless of if they are still working for the business.

What Are the Rules Regarding Contributions?

SEP contributions are decided by the employer each year. Employers can contribute up to 25% of an employee’s compensation, as long as the contribution does not exceed $54,000 (for 2017). Employers must contribute equal percentages of salary to each eligible employee. An exception occurs when 25% of an employee’s W-2 compensation would exceed the $54,000 limit. In this case the employee would be capped at the $54,000 limit.

SEP IRA Summary Details

Highlights of SEP IRAs

• Any employer with one or more employees can create a SEP plan

• Easier and cheaper to administer and maintain compared to other retirement plans such as 401(k)s

• SEP contributions are made on a discretionary basis

• Contributions to SEP IRAs are immediately vested

Taxation

• Employee and employer contributions are tax deductible

• Investments grow tax deferred within the account

• Distributions in retirement are taxed as ordinary income for the participant

Employer Eligibility

• Any employer with one or more employees can create a SEP plan

• Cannot have any other employer retirement plans in place

Employer Contributions

• Employer may contribute up to 25% of employee’s compensation up to $54,000 (for 2017).

• Employer contributions are discretionary and the employer may elect to not make any contributions in a given year

• Employers must contribute equal percentages of salary to each eligible employee

Employee Contributions

• Minimum: $0

• Maximum: $5,500, individuals older than 50 my contribute an additional “catch-up” $1,000 (for 2017)

• Employee’s contributions to their SEP IRA are counted towards their total allowable IRA contributions for the year. Meaning an employee (under age 50) that contributes $5,500 to their SEP IRA would not be able to make any contributions to a Roth IRA.

– Wyatt Swartz

– Contributions by Eli Perlmutter

– 4/7/2017