A SEP IRA is an IRA that is designed to make it easier for business owners to provide retirement plans for their employees.  SEP IRA is an abbreviation that stands for Simplified Employee Pension Individual Retirement Account.  This type of account is easy for owners to manage, and it has the added benefit of allowing business owners to set up a retirement plan even if they have no other employees besides themselves.  That makes it incredibly popular among self-employed business owners.

SEP IRA Rules

Employers are required to meet certain requirements if they offer a SEP IRA plan to their employees.  The SEP IRA rules stipulate that employers who offer this type of retirement plan must allow any employee who meets certain criteria to participate in the plan.  If an employee is at least 21 years old, has worked for the employer for any length of time during three of the past five years, and has received wages of at least $550 during the year, the employer must allow the employee to participate in the SEP IRA retirement plan.  Employers can also allow employees who don’t meet these criteria to participate, but it is not required that they do so.

SEP IRA Contributions

The SEP IRA contribution limits for employees other than the owner are 25% of the employee’s wages for the year or $49,000, whichever is lower.  If the employer offers other defined contribution plans to employees, the total amount contributed to all accounts cannot exceed these limits.  The contributions made to a SEP IRA must be proportional to the employee’s wages.

The maximum SEP IRA contribution for the business owner is figured differently than that of other employees.  For the self-employed owner, the contribution limit is 20% of the net self-employment income after expenses and after subtracting 1/2 of the self-employment tax.

SEP IRA Contribution Deadline

Businesses that wish to set up a SEP IRA must do so by the deadline to file their tax return for the year in order to make contributions in that tax year.  The deadline for funding the SEP IRA is the same.  If the business owner files an extension, the deadline to establish and fund a SEP IRA is also extended.

What Does This Mean to the Employee?

To the employee, a SEP IRA is simply a traditional IRA in which contributions are made by the employer rather than the employee.  An employee who has a SEP IRA has the ability to manage the funds in the account and determine how they will be invested.  However, the employee’s options are limited to those offered by the brokerage or financial institution that holds the account.

Tagged with: • • •

Filed under: SEP IRA

Like this post? Subscribe to my RSS feed and get loads more!