SEP IRA

What is a SEP IRA?

SEP IRA (Simplified Employee Pension) retirement plans benefit self employed individuals and small business owners. A SEP IRA allows a contribution of up to 25% of compensation up to a maximum of $50,000 for 2012. Employee do not contribute to a SEP IRA because they are 100% employer funded. In general, contributions into a SEP IRA are 100% tax deductible to the employer.

Investment earnings in a SEP grow tax deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. If withdrawals are made prior to age 59 1/2 you may incur a 10% IRS penalty in addition to ordinary income taxes. Each eligible employee has their own separate SEP IRA account which is then funded by the employer. A SEP IRA may be a good option for employers who want to make high contributions to their own accounts and to the accounts of partners or eligible employees. A self employed individual with no employees other then a spouse may also want to consider an Individual 401k as well as a SEP IRA.

SEP IRA Eligibility

Incorporated and unincorporated businesses. Sole proprietors, partnerships, LLCs, Subchapter S and C corporations qualify. Also, individuals with self employed income may be able to contribute to a SEP even if they are already covered by a retirement plan (i.e. 401k or 403b) through their full time employer.

Tax Advantages

Contributions are generally tax deductible and investment earnings grow tax deferred.

Contributions

100% funded by the employer. Contributions to a SEP can be made between 0% to 25% of compensation up to $50,000 for 2012. Contributions are flexible and the percentage of contribution can vary year to year depending on profitability. Contributions do not need to be made each year.

Learn more about a SEP IRA.