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Simplified Employee Pension (SEP) IRA

Last Updated November 28, 2014

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.