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.