A SEP IRA is a very popular retirement plan especially for the small companies or those of us who are self-employed. Some may ask “What is a SEP IRA? What makes it so popular?”
A SEP is a retirement plan tailored for those who own small businesses with a small number of employees or a self-employed individual. Because this retirement plan’s target demographic involves those companies or individuals who do not have a huge income capable to sustain a high priced retirement plan, the terms of a SEP are very flexible, while giving the same benefits to employees as a traditional IRA.
Employers are the one who setup the SEP plan. Employees are responsible for their own individual IRAs where the contributions of the SEP will go to.
In this retirement plan, only the employer is allowed to make contributions to the SEP. Any contribution made cannot be taken from the employee’s salaries. Though it may seem like the employer is at the losing, end that is not the case. Contributions made by the employer are 100% tax deductible.
When it comes to contribution limits, the maximum possible contribution is the lesser of $49,000 or 25% of the annual salary of the employee. Contributions and benefits given must be equal for all employees involved in the SEP.
The beauty of this plan is in its flexibility. Employers can choose when and how much they want to contribute to the SEP. So if business is not doing well, they can choose not to make contribution now, or just give a lower contribution. If profits are up, then the employer can take advantage of the high contribution limits for a bigger contribution to the SEP.
Ina small business where time, budget and resources are limited, flexibility is important. A SEP IRA gives a business owner all the flexibility he or she needs to provide the employees with retirement plan benefits without putting the business in jeopardy. It’s also convenient because employees can do a 401k rollover into the SEP plan which ensures their retirement funds keep growing.
- Which Is Best for My Small Business? a SEP IRA or SEP 401k? (2008taxes.org)
- SEP IRA: the Flexible Retirement Plan (2010tax.org)