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8 Things To Know About a SEP IRA

By: , dated February 8th, 2010

A Simplified Employee Pension IRA (SEP IRA) is the way to go if you’re a small employer (typically less than 10 employees and many times just one employee) looking for a simple retirement plan that’s easy to implement and administer. Most financial institutions will have the plan documents on file and it’s as easy as opening up any investment or bank account.  For those of you that don’t know how easy it is, it’s as simple as filling out a couple forms and you’re good to go.   Here are some items that you need to know about the SEP IRA for 2009 and 2010.

1. Last Minute Set-Up

The nice thing about a SEP IRA is you can open (or adopt) it at any point up until the due date of the employer’s income tax return, including filing extensions.  If you are small business, a SEP  IRA might be a better option than the Simple IRA or 401k.  I’ve had several business owners who after meeting with their tax professional called me to set up a SEP IRA at the last minute.  Never fun, but at least we know its an option.

2. Easy To Set Up

A few forms is all that separate you from having a SEP IRA set up for your business.  SEP IRA’s can literally be set up in a day’s time. In most cases, it is as simple as completing the IRS Model Form 5305-SEP agreement. 401k’s on the other hand, require more up front work to get them set up and maintain.  Also, the administration cost for the SEP are typically very inexpensive compared to its counterpart the 401k.

Although simple, SEP IRA’s have the ability to include more complex features such as social security integration.   If this the case, some sort of special prototype plan would have to be put in place.

3. Benefits To Go

If you are an employee for a business that offers a SEP IRA, once your employer makes a contribution to your account, that money is yours.   That’s different that most 401k plans that usually have some sort of vesting schedule before your money is portable.

4. Employers Don’t File

Unlike a 401k where the employer has to file a IRS Form 5500, that is not required for the SEP IRA.  For any employer that has gone through this process, they realize the time and effort it takes to make sure this form is filed correctly.

5. 2009 and 2010 Contribution Levels

For 2009 and 2010, you can contribute the lesser of 25% of net earnings from self-employment or $49,000. This is an increase of 20% and $46,000 from 2008.

For example: if you are a business owner and your self-employment income is $40,000 you would only be allowed to contribute $10,ooo ($40,000 x 25%) for 2009.

6. Only The Employer Contributes

Contributions do not have to be made every year and are made by the employer only.  Employees do not make payroll deducted contributions.  If some cases, an employee may be allowed to make contributions to their SEP IRA as a Traditional IRA falling under the IRA contribution limits.

7. Include The Part Timer’s

Part time employees who are 21 years of age who have worked 3 out of the preceding 5 years, earning $500 or more annually, must be covered by the plan which means if you contribute to the plan on your own behalf, you must do the same for any qualifying employee.   Keep in mind that the previously mentioned are guidelines when the employer is required to contribute on the employee’s behalf.  If the employer chooses to contribute to an employee is less than 21 years of age, it is their full discretion.

8. Can You Borrow Against a SEP IRA?

Unlike the 401k, the SEP IRA does not have any borrowing provisions.  One bonus to the SEP vs. the Simple IRA is that you are not subject to the 2 year 25% rule.

In conclusion

For most self-employed individuals, the simplicity and effectiveness of a SEP IRA make it a great way to save for retirement and reduce your tax bill even further, especially if you’re down to the wire trying to get any last write off you can.

Jeff Rose Jeff Rose, CFP is the owner of Good Financial Cents, a Financial Planning and Investment Blog by a Certified Financial Planner with a goal of helping you make "Cents" of your investments. (Follow )

Copyrighted 2014. Content published with author's permission.

One Response to “8 Things To Know About a SEP IRA”

  1. Roberto B says:

    I understand that I can take money out of my SEP, without taxes or penalties, as long as I return it within 60 days. However, I read that they will keep 20% of what you ask for taxes. But the whole amount must be returned. So, if I take out 60,000, they will actualy give me 48,000. But I have to return 60,000 after 60 days. So my account will end up with an extra 12,000 that year. Wouldn’t this put me over the amount of money I am allowed to deposit into my SEP on a yearly basis. I’m confused. Can you shine some light on this? Thanks!

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