Basics About SEP-IRA Retirement Plans

The Simplified Employee Pension Individual Retirement Account (SEP-IRA) is a retirement plan available for self-employed individuals and small businesses.  It is basically a written plan that allows a self-employed individual to contribute towards retirement without the complexity of other plans.

Eligibility and exclusion

The SEP-IRA can be participated by a self-employed person or employee of a small business who is at least 21 years of age, has worked for the company at least three of the last 5 years, and has received at least US$450 in compensation for the year. 

However, employees covered by a union contract with retirement benefits bargained by the employees themselves, as well as some nonresident alien employees, are excluded from this plan.

Contribution and deduction limits

Self-employed individuals contribute the lesser amount between 25 percent of the net self-employment earnings in a year or US$46,000 for 2008.  Meanwhile, deduction limits is determined by the IRS.  You can refer to the IRS Publication 560 for more information.

On the other hand, small business employees also contribute the lesser of 25 percent of their compensation or US$46,000 for 2008; while the most they can deduct is the lesser of the contributions for the employee for the year or 25 percent of the employee’s total compensation not exceeding US$46,000 for 2008.

Advantages of SEP-IRA

With SEP-IRA, investment earnings grow tax-deferred until it is distributed and has low administrative costs.  Contributors are also not locked into making contributions every year, and would find the plan as easy to set up and operate.

 

Posted by Ardent Editor on Sep 11 2008 in IRAs

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