Simplified Employee Pension (SEP IRA)
What Is a Simplified Employee Pension and how does it work?
A Simplified Employee Pension IRA, better known as a SEP IRA, offers business owners fewer administrative tasks and greater flexibility. As an employer, you can make tax-deductible contributions to the account based on your needs and those of your employees.
Who is eligible for a SEP IRA?
Many businesses can set up a SEP IRA plan, but it works best for self-employed people and small businesses with few or no employees, such as sole proprietors and freelancers. These plans allow small business owners to save for their retirement and contribute to their employees' retirement.
What are the benefits of a SEP IRA?
SEP IRAs allow business owners to make tax-deductible contributions to lower their taxable income as well as benefit from tax-deferred earnings on these contributions. They also allow for higher contribution limits compared to other traditional IRAs.
What other benefits does the SEP IRA offer?
All SEP IRA accounts established at Lake Avenue Financial, come with assistance in establishing the plan and one-on-one investment guidance. With the SEP IRA, employers also get flexibility and can decide how much to contribute each year up to the allowed maximum, but you are not required to contribute each year.
What are the contribution limits?
Employers may contribute up to 25% of each eligible employee's income, but no more than $69,000 per person for 2024. Employers can change the percentage contributed every year, skip years entirely, and even contribute one year and then never again. Each eligible employee must receive the same percentage. SEP IRA contributions are discretionary and must come from the business owner only.
What is the contribution deadline?
A SEP IRA can be opened and contributions made until the employer's actual tax-filing deadline, including any extensions. Plans must be established by the tax filing deadline of the business in order to contribute for that tax year.
What are the administrative responsibilities of a SEP IRA?
SEP IRAs are easy to set up and maintain, and no tax filing is required. Employees need to notify employees of the employer's contribution. Lastly, employers must fill out and retain the Form 5305 SEP in their records.
What are the rules for withdrawals from a SEP IRA?
Distributions from a SEP IRA may be subject to tax and a 10% early withdrawal penalty under age 59 ½, but exceptions may apply. You can start making penalty-free withdrawals from your SEP IRA plan after age 59½. Minimum required distributions start at age 73.
What else should business owners with employees know?
Each employee must be included in the plan if they are an individual (including the employer) who:
Has reached age 21.
Has worked a minimum of 3 of the previous 5 years.
Has earned at least $750 in the year for which the contribution is made.
An employer can use less restrictive participation requirements than those listed above but not more restrictive ones.
An employer can exclude union employees.
The employer must also meet all requirements to qualify for a contribution.
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