IRA SEP – The Pros and Cons
An IRA SEP is the remarkably simple and smart plan structured to help self-employed people and small business owners who want to save now for their retirement years. Sole proprietorships, partnerships, S and C corporations and LLCs can qualify and can take advantage of the IRA SEP. The plan has a wide appeal since it is inexpensive to establish and manage, flexible in that it authorizes rollovers, and has a greater than expected and discretionary contribution policy. An IRA SEP plan can be set up by a company owner with employees or by a single-person business . Contributions are paid directly to an individual retirement account existing for the benefit of the business owner and each eligible employee. An eligible employee must be at least 21 years old, have worked for the company in at least three of the last five years, and received $550 in compensation from the employer for the year. Contributions to an IRA SEP are generally 100% tax deductible, and the investment earnings in an IRA SEP grow tax-deferred. Distributions , allowed after age 59 ½ years old, are taxed as ordinary income. Any withdrawals prior to that age may trigger a 10% IRS penalty as well as the normal income taxes. Distributions must start by age 70 ½ years old. The yearly contributions an employer can fund on behalf of the employee to the IRA SEP cannot exceed the lesser of 25% of compensation or $49,000. These same contribution caps will apply to the IRA SEP of a self-employed person, and all contributions are made in cash, not stock. The plan isset up by adopting a SEP agreement and eligible employees opening SEP IRAs. A formal written agreement is drawn up and each qualified employee is given a written copy. The IRA SEP can be established at any time throughout the tax year up until the due date of the employer’s tax return.
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