What Are SEP IRAs?
What Are SEP IRAs?
Sole proprietorships, those who are self-employed and traditional employers all have a way to share profits through what’s known as a simplified employee pension plan (SEP). This way, employers are eligible for tax deductions whenever they make employee pension plan contributions. Even better with this plan is the fact that employees do not have to worry about paying taxes for those contributions, at least not until they start making withdrawals. To truly make the most of this win-win pension plan, you’ve got to know more about how it works.
A Closer Look
Individuals and employers who set up SEPs do so with the knowledge that they will make financial contributions to their employees’ accounts as long as those accounts are maintained. Companies also have to offer qualifying workforce members benefits, and those qualifying members include those who are at least 21, have been part of the business’s workforce for three out of the five years before the year of contribution and make at least $600 a year.
How Contributions Work
In regards to contribution limitations for SEPs, they are either 25 percent of the employee’s compensation or $54,000, whichever is lower. Employers have the right to decide each year how much they want to contribute as well as the amount they’d like to contribute.
Here it’s worth pointing out that pension plan contributions can be put into a separate IRA account if the employee prefers that option and if he or she qualifies for that option. That being said, it’s up to the individual employee to set up and manage that separate IRA account.
How Distributions Work
As far as distributions for SEPs, they work much like distributions for standard IRA accounts. For instance, they’re taxed the same as regular income and are not available for withdrawal until the account holder has reached the age of 59 and a half. Should the employee decide to make an early withdrawal, she or he can expect to be hit with a federal income tax penalty of 10 percent if exceptions cannot be made. Once the account holder reaches the age of 70 and a half, however, he or she has to start making the minimum account distributions every year.
SEP IRAs are known as one of the more convenient retirement plan options, especially for those who are self-employed. For both employees and employers, it’s a good idea to speak with a retirement professional about how to make the most of a SEP and the unique advantages it offers.