SEP IRA Specifics

SEP IRA contributions for a self employed individual with no employees.

Contributions between 0% and 25% of compensation up to a maximum of $49,000 in 2008 ($46,000 in 2008) can be made into a SEP. For incorporated businesses, compensation is based on W-2 income and there is a 25% maximum contribution. For sole proprietors compensation is based on adjusted earned income. Adjusted earned income is determined by completing an IRS worksheet. SEP contributions of 20% of adjusted earned income can be made for sole proprietors. Annual compensation of more than $245,000 in 2009 cannot be taken into consideration for determining contributions.

Self employed individuals should also consider an Individual 401k as an alternative to a SEP IRA. When compared to a SEP IRA, an Individual 401k may allow a greater contribution at the same income level due to the way the contribution is calculated.

SEP IRA versus Individual 401k

Compare the features of these retirement plans and determine which plan is more appropriate based on your situation SEP IRA vs Individual 401k.

SEP IRA contributions for a small business owner with employees.

With a SEP, contributions are made by the employer (employees do not contribute). All eligible employees have their own individual SEP account. Contributions are made by the employer to the employer's SEP as well as to any eligible employee's SEP accounts. The employer can elect to contribute between 0% to 25% of compensation and the percentage of contribution can vary annually at the employer's discretion. The employer and all eligible employees must receive the same fixed percentage. The annual contribution made by the employer is tax deductible.

Who is considered to be an eligible employee?

Generally when a SEP is established IRS Form 5305 is completed. This short form sets the eligibility requirements for determining who is eligible such as age and length of employment. This form should be kept on file by the employer. When the employer and employees meet the eligibility requirements stated on the completed 5305 form then the employer must make contributions on their behalf. Employers must satisfy the same requirements as the employees. Employers can make the eligibility requirements less strict, but must make contributions to employees if they meet the following 3 requirements:

• 21+ years old
• Have at least 3 years of service in last 5 years
• Have earned at least $450 in compensation from the employer for the year.

Establishing and funding a SEP IRA

SEPs are easy to setup and maintain and do not require annual tax filings. Generally a SEP IRA must be established and funded by the tax filing deadline of the individual if a sole proprietor or the business if incorporated. Generally filing extensions extends the period for establishing and funding the plan. There is no upper age limit to establishing a SEP.

Withdrawals

Withdrawals after age 591/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes. At age 70 1/2 Mandatory Required Distributions are required.

Learn more about a SEP IRA

   Need Help or Advice?  |  Open a SEP IRA

Disclosures:

* The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.