The SEP IRA is suited for "S" Corporations, partnerships, non-profit organizations, sole proprietors (self-employed) and any size business. It is a particularly good fit for small employers and start-up plans.
With a SEP IRA, the employer is adding an attractive benefit for employees. Each employee establishes his own Traditional IRA to receive the SEP contributions, selects his own IRA trustee or custodian and chooses and directs his own investments, thereby relieving the employer of many of the administrative responsibilities normally associated with the retirement plan.
Since each employee maintains his own Traditional IRA to hold SEP contributions, the employer avoids large maintenance fees that traditional business retirement plans often incur.
The employer is permitted to deduct the contribution made on behalf of each employee. Any earnings on the SEP account assets accumulate tax-deferred until withdrawn.
Eligibility Requirements
The employer must include eligible employees who have met the following requirements:- Reached age 21
- Worked at least three or more of the five preceding years (Note: Any work in a calendar year counts as a year of service)
- Earned annual compensation minimums (Amounts are adjusted periodically for inflation).
Contribution Limits
In 2011, contributions an employer can make to an employee’s SEP IRA cannot exceed the lesser of 25% of employee’s compensation or $49,000. Please note the contribution limits are different for self-employed persons (see IRS Publication 560).The annual compensation limit is $245,000; individuals earning more than that amount can contribute to a SEP IRA, but any compensation over $245,000 cannot be included in determining the allowable contribution amount.
Deadlines for Contributions
On or before the employer’s tax-filing deadline, including extensions. A SEP may be maintained on a calendar year basis or non-calendar, fiscal year basis.Qualified Distributions (without tax penalty)
- Reaching age 59½
- Permanent Disability
- Death
- Substantially equal payments based on a life expectancy formula that cannot be modified for at least five years OR until reaching age 59½, if later
- Payments for medical expenses in excess of 7.5% of Adjusted Gross Income (if deductible on taxes)
- Payments for medical/health insurance premiums for certain unemployed individuals
- Purchase of a first home ($10,000 lifetime limit)
Education Expenses
For distributions used to pay for post-secondary education expenses of individual, spouse, child or grandchild at an eligible educational institution - the distribution is reduced by amounts received from tax-free scholarships, grants and other tax-free education assistance programs.For 2012:
