SEP IRA Explained
SEP IRA stands for Simplified Employee Pension Individual Retirement Account, which is a variation of the IRA specially used in USA. The advantage is that if you are self-employed and have no employees, there are no administration costs. But if you do have employees working for you, then all of them must get the same benefits under an SEP plan. For the year 2007, employers had to contribute as the SEP IRA contribution a maximum of 25% of an employee's eligible compensation, or $45,000, whichever is less. But in the next years, the maximum sep ira contribution will be edited for cost-of-living adjustments as published by the IRS. It's important that you don't exceed the limits, because there is a non-deductible contribution penalty tax of 6% of the excess amount contributed that will be incurred for each year in which an excess contribution remains in a SEP-IRA. A disadvantage of SEP IRA is the SEP does not allow participants to borrow money from their account, nor does it allow participants over age 50 to put away an extra $5,000 in catch-up contribution, or to grow those funds tax-free as you can in a Roth IRA. To make use of these features, one should consider getting a Self-employed 401(k) plan. Generally, the entire SEP IRA enrollment process is fairly short and easy. All it takes is to fill a two page application, while the employer has to complete Form 5305-SEP. An employer who is not eligible to use a Form 5305-SEP may use another prototype SEP or an individually designed SEP. The employee fills the IRA investment application which is given by the institution that will hold the funds. Nothing has to be filed with the IRS to establish the SEP-IRA or the opposite, while is different from most of the other retirement plans that require IRS annual returns. To determine how much you should be contributing to your sep ira plan, use a SEP-IRA contribution calculator such as the one available at http://personal.fidelity.com/. This SEP IRA calculator can be used if are self-employed or your business is not incorporated. In order to estimate the contributions for your employees, just multiply the percentage you will get for yourself by their respective wages, as stated in their W-2. This percentage is called Actual Contribution Percentage and it can vary each year. To participate in SEP IRA, the employee must meet the following requirements: age at least 21; earns at least $500 for the year; has worked for the employer three out of the five years prior to the year for which the contribution is being made.
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