What Are The Basics Of A SEP IRA?

A Simplified Employee Pension (SEP) plan provides employers with a way to make contributions to their employees’ retirement.

Note: Contributions must be made directly to an IRA that is set up for each employee, specifically a SEP IRA.

  • A SEP IRA plan has Low Costs.
  • SEP IRAs do not have the operating and start-up costs that most conventional employer plans do.
  • Contributions are tax-deductible in a SEP IRA plan.
  • You can make tax-deductible contributions of up to 25% of each employee’s compensation.
    • Bonus: If you are self-employed, you are considered an employee!
  • Freedom of Choice with a SEP IRA plan
  • You do not have to contribute the same amount each year.
  • You can Self-Direct a SEP IRA plan.
    • Use your Self-Directed SEP IRA to invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals, and much more!

Why Consider a SEP IRA Plan?

  • You want the freedom to choose whether or not you make contributions each year.
  • You want a plan with low start-up and operating costs.
  • You’re looking to add a valuable plan to your benefits package to attract quality employees.
  • You want to contribute to your employees’ retirement and yet you want the flexibility to decide how much you contribute.
  • You are a sole proprietor, independent contractor, self-employed, partner, or corporation.

Who Is Eligible For A SEP IRA

An employee is eligible for a SEP if:

  • Have reached age 21.
  • Have worked for you at least 3 of the last 5 years.
  • Have received at least $600 in compensation from you in 2016. This amount will remain the same $600 in 2017.

An employer can exclude an employee from the plan if:

  • They are covered by a union agreement and their retirement benefits were bargained for in good faith by their union and you.
  • They are non-resident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.

SEP IRA Guidelines:

  • All contributions you make to both your SEP and your employees’ SEP are tax-deductible.
  • Annual contributions an employer makes to an employee’s SEP IRA cannot exceed the lesser of:
    • 25% of compensation, or
    • $53,000 for 2016 and $54,000 for 2017 (subject to annual cost-of-living adjustments for later years).
  • These limits apply in the aggregate to the contributions an employer makes for its employees to all defined contribution plans, which includes SEP IRAs.
    • Only up to $265,000 for 2016 and $270,000 for 2017 of an employee’s compensation may be considered.
    • Contributions must be made in cash-property can NOT be contributed.
  • Employees have complete control over his/her contributions.
  • You have the freedom of choice to decide what percentage you contribute each year keeping in mind that the percentage you contribute must be the same for all employees.
  • You may make contributions up until you file your tax return each year, including extensions.