Back to Basics: The SEP IRA

What exactly is a SEP IRA?  It stands for Simplified Employee Pension plan and it’s designed especially for smaller businesses including owner-only businesses.  It does not have the start-up costs of other retirement plans and you can contribute up to 25% of each employees’ pay.

A SEP is available for any size business and is easily instituted using Form 5305-SEP, a SEP prototype or an individually designed plan document.  You can set up the account for each employee with most financial institutions.  The employee owns and controls the SEP IRA.  There are no filing requirements for the employer however only the employer contributes to the plan.

How does a SEP work?  A business owner will open up the SEP IRA.  The plan offers flexible contribution requirements.  When times are good, more money can be contributed.  The opposite is also true.  The contribution rate must be equal (no matter how large or small) to every employee covered in the plan.  The financial institution that is chosen to run the plan will have investment funds that the employee can choose from.  He or she cannot contribute money into the plan.  As stated, only the employer contribute to it.

The maximum that can be contributed for each employee for 2013 is the lesser of a) 25% of the employee’s compensation or b) $51,000.  There are no “catch-up” contributions for a SEP.  Administrative costs are low making it an affordable options for a small business.

Contact the tax experts at the IRA Financial Group to see if a SEP IRA is right for you and your business.  Don’t forget to follow us on Twitter @BergmanIRA for blog updates, helpful links and interesting articles!

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