A simplified employee pension (SEP) is a written plan that allows the self-employed and employees to make retirement contributions to individual retirement arrangements (called SEP-IRAs). SEP-IRAs are attractive to self-employed individuals because this plan allows you to make contributions toward your own retirement and your employee’s retirement without getting involved in a more complex qualified plan (which require annual tax return filings).
Contributions to a SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation or $49,000. Compensation generally does not include your contributions to the SEP and the employee’s Form W-2 does not include these SEP contributions. The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants.
Several strengths of the SEP-IRA include:
(1) Contributions to the plan are pre-tax and grow tax deferred.
(2) The plan does not require the employer to make contributions.
(3) The plan can be adopted and funded after year end (but no later than the due date of the employer’s return, including extensions).
(4) This plan is simple to establish and maintain.
(5) Since SEP accounts are treated as IRAs, funds can be invested the same way as any other IRA.
There are a few tradeoffs to consider as well:
(1) All eligible employees must be included in the SEP.
(2) Employees have immediate access to contributions and are 100% vested in their contributions.
(3) The SEP-IRA account is both owned and controlled by the employee.
(4) This plan does not allow for employees to contribute to the plan through salary reduction.
When it comes time to withdraw funds from a SEP-IRA, you will follow the rules for withdrawal of the traditional IRA.
Call us to see if a SEP make sense for you.
Questions or Comments?
Mark Vitek, CPA/PFS, CFP®
…until next week.