Retirement Ready with the SEP Traditional IRA
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.