SEP Retirement Plan
For an easy, low-cost retirement plan, look into the Simplified Employee Pension – known as the SEP Retirement Plan. A Sep retirement plan allows the employer to set aside money for himself and for the employees of his company by directly contributing to traditional individual retirement plans set up for everyone, and allowing a contribution of up to 25% of each employees pay to the plan. The contributions to the Sep retirement plan are tax-deductible, and the business pays no taxes on earnings on the investments within the plans. Flexibility of the plan means the employer is not required to make contributions every year, so the employer can decide on the percentage on an annual basis and even choose to hiatus the plan if profits are down or he simply decides not to make contributions for a given period of time. Administrative costs of the Sep retirement plan are low, and normally there are no forms that must be filed with the government. Sole proprietors, partnerships, and corporations can set up SEPs. Eligible employees for the plan will be at least 21 years old and have worked for the company for three of the last five years. A SEP can be established as late as the due date, including extensions, for the year in which you want to establish the plan. The employer will choose the financial institution that will administer the SEP: receiving and investing the contributions, and providing each SEP participant with a notice of the employer’s annual contributions and the year-end value of his/her SEP IRA. These trustees are usually banks, brokerage houses, or mutual fund companies who have been approved by the IRS. The employer will complete and sign Form 5305-SEP, which becomes the plan’s legal document and describes the rights and benefits of the employees. It sets out the pertinent terms, including eligibility, employer contributions, and compensation. Each employee is then given a written statement of explanation regarding the Sep retirement plan, clarifying certain features: the SEP IRA may provide different rates of return and contain different terms than any other IRA the employee may have, the administrator of the SEP will provide employees with a copy of any amendment within 30 days of effective date, along with written explanation of its effects, and participating employees will receive a written report of employer contributions to SEP IRAs by January 31 of the following year. The employer forwards contributions to the plan’s trustee for the participating employees. It is the employer’s responsibility to make the trustee aware of any change in the status of employees participating in the Sep retirement plan. When the employer makes contributions, they must be uniform for all qualifying employees, although the employer is not required to make those contributions every year. Participants cannot take loans from their SEP IRA. They can, however, make withdrawals at any time or can roll over the money tax free into another SEP IRA, to another traditional IRA plan, or another employer’s qualified retirement plan. Any money withdrawn, not rolled over, will be subject to income tax for the year it is taken, and if an employee withdraws money from the Sep retirement plan before age 59 ½ there is normally an additional penalty tax of 10%. Similar to many other IRA types, mandatory distributions on the Sep retirement plan begin when the participant reaches age 70 ½ years old.
