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February 16, 2009

Simplified Employee Pension (SEP) IRA

Your Guide

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Definition

An IRA based retirement plan established by an employer (business) for its employees. Under a SEP IRA, the employer makes SEP contributions to Traditional IRAs established y and for eligible employees.

Definition

An IRA based retirement plan established by an employer (business) for its employees. Under a SEP IRA, the employer makes SEP contributions to Traditional IRAs established y and for eligible employees.

Some financial institutions require that the traditional IRA be flagged/identified as a SEP IRA in order for SEP employer contributions to be made to the account.

Earnings on SEP IRA assets accrue on a tax-deferred basis and distribution amounts are treated as ordinary income.

Once SEP contributions are made to the IRA, they take on the characteristic of traditional IRA assets, including being 100% vested.

Employers are eligible to deduct contributions they make to their employees accounts, up to the limits that are in effect for the year.

Employer may exclude the following employees:

  • Certain nonresident aliens
  • Employees  under age 21
  • Employees who have performed less than three years of service during the previous five years
  • Employees covered under a collective bargaining agreement
  • Employees with compensation of less than $600 ( indexed for inflation)

Referring Cite

IRC § 408(k), IRS Publication 560

Additional Helpful Information

  • An employer may contribute the lesser of 25% of compensation or the dollar limit that is in effect for the year.
  • For unincorporated business owners, their percentage is 20% of their modified net profit.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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