A Simplified Employee Pension plan, referred to as a SEP, is essentially a grouping of traditional IRAs managed for employees. The SEP traditional IRA was developed to benefit small businesses and self-employed people, and is frequently the plan of choice for sole proprietorships, LLCs, S and C corporations, and partnerships. In the small business model , an employee, including the business owner who is also eligible to participate in the plan , must establish a traditional IRA into which the employer will fund the SEP contributions. The SEP traditional IRA has more generous contribution restrictions than other types of individual retirement accounts. An eligible employee can contribute as much as 25% of annual compensation to their account. To be qualified for participation the employee must be at least 21 years old , have worked for the company three of the last five years, and been compensated for that work with at least $550. Contributions must be consistent , so a 20% contribution to the SEP traditional IRA on behalf of one employee calls for a 20% contribution to the SEPs of all eligible employees. The employer has the option of reviewing and adjusting the contribution amount, or even suspending the contributions. Sometimes this is a choice reached based on the company’s annual profit outlook orlatest economic circumstances. Once contributed, the money is totally vested and can be transferred to a new employer’s sponsored retirement plan in the case of a career change, or rolled into another IRA. Because the SEP traditional IRA is still basically a traditional type of retirement account, the assets are subject to a lot of of the traditional IRA rules as pertains to distribution and investment selections. The huge difference and great benefit is the significantly increased contribution limit for the SEP traditional IRA that makes it possible for account owners to defer more toward their retirement savings at a faster pace.
The SEP traditional IRA hasa lot of of the qualities of a traditional IRA and is subject to theidentical rules on investment choices and distributions. The distinction for the SEP traditional IRA is most evident in the significantly larger contribution limit it allows . This plan was developed to benefit the self-employed person and small companies who might not have the resources to provide their employees with a more conventional retirementplan. In the small business plan, eachperson has a traditional IRA and the plans are grouped together as aSEP traditional IRA account into which the employer funds the contributions. Usually the employer will open the plans for all eligible employees. The employer funds the SEP accounts through a pre-tax salary reduction, and contribution percentage is consistent for all eligible employees. The greater allowed contribution limit, up to 25% of yearly compensation, allows the employees to accumulatemore savings for retirement at a quicker pace. This is particularly advantageous forindividuals who may have gotten a late start saving andgetting ready for their retirement years. The retirement benefits in the SEP are fully vested as soon as they are contributed, making the account portable. Employees who change employers can roll their SEP funds intoa different IRA or transfer them to a retirement plan sponsored by the new employer. Typically small businesses select a mutual funds company to manage the SEP account, allowing each employee to make their own investment choices based on theirobjectives and risk-tolerance. There is alower set-up cost for the employer with a SEP, and the reporting and record-keeping demands are simplified . Like a traditional IRA, distributions from the SEP traditional IRA canbegin as early as age 59 ½, although there is a 10% penalty for earlier withdrawals in addition to standard tax obligation. Distributions must commence no later than age 70 ½ years old. The SEP traditional IRA offers a stable savings opportunity.
A SEP traditional IRA is a plancreated to let employers contribute to the retirement accounts of their employees through a pre-tax salary reduction. The SEP traditional IRA account is established for each qualified employee, and each employee maintains control of their own account. Self-employed people can establish a SEP account for themselves. The SEP traditional IRA makes it feasible for small companies to offer retirement benefits withreduced costs and less reporting requirements than most other qualified retirement plans . The SEP has attractive benefits to offer both the employer and employees. To be qualified for the plan, the employee must be at least 21 years old , have worked for the employer for three of the last five years and received compensation of a minimum of $550. Contributions are required to be consistent for all eligible employees, so a 10% contribution to one employee’s SEP traditional IRA requires a like 10% contribution to the accounts of all eligible employees. The employer can contribute up to 25% of yearly compensation, and is permitted to adjust the amount and frequency of these contributions, or even hiatus them. Often companies decide on a mutual fundsfirm to hold the account, which provides the employees the opportunity to make their own investment decisions for their individual accounts. Once contributed, the funds areentirely vested and can be rolled over into a different individual retirement account, or for employees who change employment can be transferred to a new employer’s sponsored retirement plan. Distributions from the SEP traditional IRA cancommence as soon as age 59 ½ years old. Earlier withdrawal triggers a 10% penalty in addition to the regular tax responsibility. Mandatory distributions must begin when the account owner is 70 ½ years of age . Employersprefer the SEP traditional IRA for the straightforward set-up and lower administrative expenses. Employees particularly appreciate the higher contribution limit permitted in the SEP traditional IRA.
Retirement planning essentials
Planning for retirement can seem like an overwhelming task. How do you plan for your remaining years and manage your money so that you can retire in comfort? And how do you plan for retirement when life brings us so many unforeseen circumstances such as ups and downs in the market, job changes, family situations and health issues?
Effective Retirement Planning
A good retirement planning professional will help you cover a broad range of topics to make sure your plan is well conceived and tailored to your individual needs and circumstances.
Some of the most important elements in retirement planning include:
Savings – No matter how or where you start, having a consistent savings plan is an important part of retirement planning. Your advisor should help you evaluate how to best manage your savings and make suggestions for helping your savings grow over time.
Employer Plans like 401k & Employer Matching – Although not every employee has access to full benefits such as 401k and Employer Matching, it can be a great financial tool for those who do. With the benefits of tax deferrals and automatic savings you are more likely to see your balances grow faster than if you rely strictly on self-discipline for setting money aside.
IRAs and SEPs – Traditional IRA and SEP accounts can be effective for those who do not enjoy employee benefits as well as many who are self employed. There are a number of great choices in the types of accounts available and these should be carefully reviewed with your retirement planner to find the one best suited for you.
Insurance – Your choices in insurance coverage and programs can have a big impact on your retirement goals. Be sure to evaluate your options including whole life, term life or a combination which may best suit your needs.
Investment Management – Your overall investment management will play a large part in the retirement planning equation. Investors can choose from stocks, bonds, mutual funds and a whole host of other options to fit any retirement plan or risk tolerance. Retirement plans may also include a managed account where our investment professional will holistically manage your investment portfolio. The advantages of a managed account include a lower fee structure and greater coordination of your financial strategy.