Simplified Employee Pension (SEP-IRA)
SEP IRAs: A Low-cost, Simple Solution
If you are self-employed or a small business owner, the Simplified Employee Pension (SEP) IRA is a simple, low-cost plan you should consider. The plan allows you to make discretionary, tax-deductible contributions for yourself and your eligible employees. Earnings are tax-deferred. Investment services are provided by H&R Block Financial Advisors. Eligible business owners include:
- Sole proprietorships
- Independent contractors
- Partnerships
- Corporations
Contribution and Withdrawal Requirements
SEP IRAs provide higher contribution limits than a traditional IRA. And your contributions are tax deductible as a business expense as long as you use the appropriate allocation formula. You also have the freedom to change your contribution levels each year. For a SEP IRA covering employees, you must generally contribute the same percentage for all eligible employees, including owners, partners, officers and staff.
The maximum contribution for each participant is the lesser of 25% of an employee's wages of $44,000 (in 2006). You can decide to contribute as much as 25% of compensation one year and as little as 0% the next. It's your decision. And no additional paperwork is required to change contribution levels.
Timing Your Contributions
Unlike traditional IRAs, you can continue to contribute to a SEP IRA after reaching age 701/2 as long as you still have earned income. The deadline for making contributions to your SEP IRA is your tax return filing deadline, including extensions.
Making Withdrawals
Contributions and earnings are immediately vested in a SEP IRA and may be withdrawn by your employees at any time. Like traditional IRAs, individuals must begin taking distributions at age 70 1/2. Withdrawals made before age 591/2 may be subject to early withdrawal penalties.
Employee Eligibility
Your advisor can help you determine which employees are eligible for participation in your SEP IRA. Generally, employees who are at least 21 years of age and have been employed by you for at least three of the previous five years are eligible to participate.
Establishing the Plan
It's easy to set up a SEP IRA with H&R Block Financial Advisors. Just complete IRS Form 5305-SEP, have your eligible employees complete an IRA application and leave the rest to us. We'll provide all of the administrative and investment services you need to establish and maintain your SEP IRA. It's that simple for you and your employees to begin building retirement savings with a SEP IRA.
Advantages of a SEP IRA
A SEP IRA offers you and your employees many benefits.
You benefit from:
- A plan that's easy to administer with high contribution limits
- Tax-deductible contributions
- Flexibility to change contribution levels each year
- An enhanced benefits package for your employees
- No IRS filings
- No administration fees
Your employees benefit from:
- Deferred taxes on earnings and money invested for retirement
- An easy, convenient way to build retirement savings
- Immediate ownership; contributions are vested immediately.
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