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Small Business - Frequently Asked Questions

SEP

What is a SEP plan? What is a SEP IRA?

What are the advantages of a SEP?

What's the difference between a SEP IRA and a Traditional IRA?

Can employees contribute to another IRA if they are in a SEP plan?

Who qualifies to make SEP IRA contributions?

Can a self-employed individual, with no other employees, establish and contribute to a SEP plan for himself or herself?

Who qualifies to receive SEP IRA contributions?

Is there an age limit for receiving SEP contributions?

How much can be contributed to a SEP IRA?

How much of the employer's contribution is tax-deductible?

What are the distribution requirements for a SEP IRA?

What is a SEP plan? What is a SEP IRA?

A SEP plan allows employers to make tax-deductible contributions toward their and their employees' retirement without the cost and paperwork of administering a more-complex plan. Once the employer has a SEP plan in place, the employee will then set up his or her own SEP IRA to which the employer will deposit contributions.
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What are the advantages of a SEP?

Since contributions are tax-deductible,1 the employer saves money. And contributions to a SEP are flexible. Employers can choose to contribute as little or as much as desired (up to the IRS-imposed limitations) or even not at all. SEP IRAs provide employees with retirement benefits. Plus, their contributions and the interest or dividends earned are tax-deferred.
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What's the difference between a SEP IRA and a Traditional IRA?

With a SEP IRA, an employer makes a contribution for an employee. The funds belong to the employee (employees are immediately 100 percent vested in their SEP IRA funds). And each employee directs his or her own investments. With a Traditional IRA, the individual establishes his or her own plan and makes all the contributions to the plan.
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Can employees contribute to another IRA if they are in a SEP plan?

It depends. SEP plan participation does not, in itself, affect an employee's ability to contribute to an IRA. But employees who participate in a SEP plan are considered active participants in an employer-sponsored retirement plan. This can affect the deductibility of Traditional IRA contributions, depending on income.
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Who qualifies to make SEP IRA contributions?

Virtually every employer -- including sole proprietorships, partnerships, corporations, and tax-exempt entities -- can contribute to a SEP IRA for all eligible employees.
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Can a self-employed individual, with no other employees, establish and contribute to a SEP plan for himself or herself?

Yes.

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Who qualifies to receive SEP IRA contributions?

Employers must include employees who meet all of the following requirements:

  • Are age 21 or older
  • Have worked for the employer during any three of the preceding five years
  • Earned at least $550 from the employer for the year (subject to annual cost-of-living adjustments in later years).
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Is there an age limit for receiving SEP contributions?

No. As long as employees are at least age 21, employers must make SEP contributions for all eligible employees, even those over age 70 1/2.
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How much can be contributed to a SEP IRA?

The maximum annual contribution for each employee for 2013 is 25 percent of compensation or $51,000, whichever is less.
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How much of the employer's contribution is tax-deductible?

The entire amount of the employer's contribution is eligible as a deduction from the business's taxable income.
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What are the distribution requirements for a SEP IRA?

Since a SEP IRA is a Traditional IRA that is funded with an employer's SEP plan contributions, distributions are treated as ordinary income, just like a Traditional IRA. Thus, a SEP IRA is subject to all of the Traditional IRA rules, and early-withdrawal penalties may apply for withdrawals taken prior to age 59 1/2.
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