Posts tagged "IRAs"

How Are SEP IRAs Established To Save For Retirement

How Are SEP IRAs Established To Save For Retirement

A Simplified Employee Pension (SEP) plan is established when an employer adopts a SEP agreement and has a minimum number of employees working in the organization who qualify for owning a SEP-IRA account. The qualification criteria for an employee to become eligible for the employer’s SEP-IRA plan include:

1. The employee must be at least 21 years of age.
2. The employee must have worked for the employer for a minimum of three years in the last five consecutive years.
3. The employee must have earned at least 0 in compensation for that tax year.

Hence, a SEP can be established if an organization has a certain minimum number of employees fulfilling the above criteria and the employer agrees to adopt a SEP agreement. There are three basic steps in setting up a SEP account and all of those must be fulfilled.

1. For setting up a SEP-IRA account, a legally valid written agreement should be executed. This agreement has to conform to an Internal Revenue Service (IRS) specimen SEP using ‘Form 5305-SEP’, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. A prototype SEP that was earlier approved by the IRS may also be used for the same. Various insurance companies, banks and other competent financial institutions offer approved prototype SEPs. In the end, an individually designed SEP may be adopted.

2. Every employee who is eligible for a SEP must be given necessary information about the SEP. If the SEP was established using the Form 5305-SEP, the information must also include a copy of the Form 5305-SEP, instructions to fill it up, and the remaining details listed in Form 5305-SEP guidelines. In case a specimen SEP or a personally formulated SEP was used, similar information must be provided to every employee in the organization who is eligible for opening up a SEP account.

3. A SEP-IRA must be set up for every eligible employee in the organization. Various insurance companies, banks or other competent financial institutions can be used to set up a SEP-IRA. The employee holds and controls a SEP-IRA account while the employer is required to send the SEP contributions to the financial institution where the organization’s SEP-IRA account is maintained.

Thus we can see that an employer can establish SEPs very easily in order to take care of the post-retirement financial needs of his employees. The two major requirements on the part of the employer to establish SEPs include availability of eligible employees who can own SEP-IRA accounts and adoption of a SEP agreement as specified by the Internal Revenue Service (IRS). After meeting these two criteria, the employer can decide on the insurance company, bank or other competent financial institution where he wants to set up the organization’s SEP-IRA account for meeting the retirement needs of the employees. Hence, SEP-IRAs are found to be very easy to establish by the employers and equally easy to operate by the employees. It allows all the benefits of an IRA in a much-simplified form.

More Sep Ira Articles

SEP IRAs: Useful Savings Plans for the Smallest Businesses | The Retirement Group: Your Partners In Retirement

SEP IRAs: Useful Savings Plans for the Smallest Businesses | The Retirement Group: Your Partners In Retirement

These are the views of Peter Montoya Inc., not John Jastremski nor QA3 Financial, and should not be construed as investment advice. Neither John Jastremski nor QA3 Financial gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Do you own a small business with a few employees? Are you self-employed? In either case, the SEP IRA may be the ideal low-cost, easily administered retirement savings plan for you.

This is a simple pension plan using a traditional IRA. (SEP stands for Simplified Employee Pension.) It lets you put aside money into individual IRAs for you and your employees, with lower administrative fees and less paperwork than other types of retirement plans.1

Tax-deferred compounding of pre-tax dollars. You contribute pre-tax dollars to a SEP IRA, and that has the effect of lowering your tax bill. The money in the IRA grows tax-deferred, and your business doesn’t pay any taxes on the IRA earnings.1 The assets can be invested in many ways.

The traditional IRA rules apply. When you take the money out of a SEP IRA for retirement, you pay ordinary income taxes on it. (Should you withdraw SEP IRA assets before age 59½, you’ll likely be assessed a penalty, with some exceptions.)2

Contributions are discretionary. Each year, you can contribute or not contribute to the IRA(s) involved. The amount you put into the IRA(s) can also vary.1

In 2009, you can contribute up to 25% of an eligible employee’s compensation, up to a limit of ,000. No catch-up contributions are permitted for older employees.3

A three-point employee eligibility test. Generally, employees of a small business are eligible for a SEP IRA if they 1) are older than 21, 2) have worked for the business in at least three of the five years preceding the year in which the IRA contribution is made, 3) have received 0 or more in compensation from the business in 2009 (this can rise with COLA adjustments in future years). However, the IRS states that an employer “may use less restrictive requirements to determine an eligible employee.”3

Employees covered by a union contract may be excluded from a SEP, as well as non-resident aliens who have not earned income from your business.3

All eligible employees must participate in the SEP – including part-time and seasonal workers and employees who die, quit, or get laid off or fired during the year.1

Are you self-employed? Assuming your business is unincorporated, you can contribute up to 20% of your net adjusted self-employment income to a SEP each year. If you have a bad year, you have the option of skipping your SEP contribution, and no penalty will come your way if you do.4

Starting up a SEP IRA is easy. You can open up one of these plans with the help of almost any financial advisor or financial institution. In fact, you can even have other retirement plans at your business in addition to SEP IRAs, and you can set up a SEP IRA for your small business even if you are already participate in another retirement plan at another company.3

Sole proprietors, partnerships, and corporations can all create SEPs. In fact, they may qualify for annual tax credits of up to 0 during the plan’s first three years, which can be applied toward the plan’s start-up costs.1 So if you have a small business or work on your own and you want a retirement plan that works for your future without a lot of hassles, talk to a financial advisor to see if a SEP IRA is right for you.

Citations.

1 dol.gov/ebsa/publications/SEPPlans.html           [2/20/09]

2 investopedia.com/university/retirementplans/sepira/sepira3.asp    [2/20/09]

3 irs.gov/retirement/article/0,,id=111419,00.html    [10/23/08]

4 publicradio.org/columns/marketplace/gettingpersonal/2008/09/_question_i_understand_that_1.html                [9/29/08]

This does not constitute an endorsement by John Jastremski, The Retirement Group or the author of the book. The opinions expressed are solely those of the author and may or may not be a representative opinion of The Retirement Group or John Jastremski. John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese Philip Catalan, Brent Wolf, Andy Starostecki, The Retirement Group, AT&T, Verizon

To sign up for our newsletter: http://www.theretirementgroup.com/new/retiregroup2/content.asp?contentid=2016566134

Find More Sep Ira Articles

Sep Iras: a Path to More Retirement Income?

Sep Iras: a Path to More Retirement Income?

A SEP IRA is a plan that may allow you to put away more tax deductible dollars for retirement. For employers, SEPs are a simple way to establish a retirement plan for employees without many of the restrictions that apply to other qualified plans and without the mounds of paperwork.

Here, however, we are going to talk about how a SEP IRA could allow you to save more for retirement if you have self-employment income outside of your job or have your own business. Business owners are both “employers” and “employees.” For this discussion, we will assume that you are the only employee.

Note: If you are involved in a business with partners or employees, the same percentage contribution is required for all employees who are over age 21, have worked in the business in at least three of the last five years and made at least 0 (2006). Other technicalities may apply.

The Rules

1. You can contribute up to 25% of your compensation, subject to a maximum. This maximum is indexed; for 2006 it was ,000 and for 2007 ,000.

2. Assuming the SEP IRA’s tax year is the calendar year, contributions can be made up until April 15th of the following year, when the tax return is due.

3. You can contribute up until you are 70 1/2, but not beyond.

4. Withdrawals before age 59 1/2 are subject to the 10% premature distribution penalty tax unless one of the exceptions apply.

5. You have to start taking the money out (RMDs) at age 70 1/2.

The Benefits

1. SEP IRAs are simple. Essentially SEPS are big IRAs. There is very little paperwork.

2. They are flexible. You can vary the amount you contribute each year from zero all the way up to the year’s maximum contribution limit.

3. The total contribution limit is indexed which allows more to be contributed each year.

4. Employer contributions are generally not subject to FICA (Social Security tax), FUTA (federal unemployment tax) or income tax withholding.

5. As an employee of your SEP IRA, you possibly can make deductible contributions as well. These contributions have the same contribution limits as traditional IRAs. For 2006 and 2007, this is ,000. If you are age 50 or over, you can add another ,000. However, if you make too much money, your contribution maximum is either reduced or eliminated.

6. You can be a participant in a qualified plan (for example, a 401(k)) at work and still be able to contribute to your SEP IRA based on your outside income. Again, this is a function of your income and subject to the phase out rules discussed below.

Phase-Out Rules

1. First, these rules apply if you are a participant in another qualified plan. Note that having a SEP IRA puts you in this category.

2. Your income and your tax filing status determine the phase-out. Technically, this is “modified adjusted gross income” (MAGI) which is adjusted gross income with certain adjustments. See your accountant.

3. If you file a joint tax return and have a MAGI of ,000 or less (2006), you can make a full employee contribution: ,000 or ,000 if you are 50 or older. If your MAGI is over ,000, no contribution can be made. A partial contribution formula determines the maximum permissible contribution for incomes between ,000 and ,000.

4. If you file a single tax return, you can make a full SEP IRA employee contribution if your MAGI is ,000 (2006) or under and no contribution for incomes of ,000 (2006) or more. Again, for incomes between these numbers, a formula determines a partial contribution limit.

5. If you are married and file a separate return, the phase-out starts at an income of zero. Adjusted gross income of ,000 or more does not allow any contribution.

These benefits and rules of SEP IRAs are based on my understanding and cannot be used as tax advice. The proper plan will depend on your goals, income, tax filing status, and your participation in another qualified plan. It would be best to sit down with your accountant and financial planner and do the math on all your options.

IRAs and Qualified Plans Offer Limited Asset Protection

IRAs and qualified Pl? ne offer Limited Asset Protection ??????????????

You k? to place your Verm? gene to the equation? creditor (that you borrowed from losing), in claims? weeks after divorce or paternity actions to claims against a made-deep pockets, or f to the state owed? r taxes.

Remember that the bottom line f? R the protection Verm? Successfully to identify-who you are and how it appropriately before the positioning of these resources – a task easier said than done! writes

More September Ira article

Latest “sep Iras” News

Buying Real Estate for Your IRA
Here’s what you need to know about investing in property for your retirement account.
Read more on FOX Business