SEP
Designed for self-employed individuals and small business owners (typically up to 25 employees), the SEP IRA (or SEP) allows annual contributions of up to $49,000 in 2009 without getting involved in a more complex retirement plan such as a 401(k). Contributions to a SEP are tax deductible, and earnings within the account are tax free until withdrawal.
A SEP is a good option for sole proprietors and small businesses owners if your goal is to contribute the highest dollar amounts possible toward your retirement portfolio and at the same time qualify for the highest annual tax-deductions.
Contribution Limits
An employer may contribute up to 25% of each employee’s annual compensation with a maximum of $49,000 in 2009. There is a salary cap of $245,000.
Advantages of a SEP
- SEP is simple to establish and maintain.
- There are no annual 5500 filing requirements.
- Contributions are deductible to the employer.
- Plan can be established at tax filing date of April 15th plus extensions.
Disadvantages of a SEP
- Loans are not permitted.
- No Roth contributions or conversion.
Eligibility
Corporations, Subchapter S, partnerships, sole proprietorships and non-profit entities may establish a SEP, even if there's only one employee. Employees must meet ALL of these requirements:
- Be at least 21 years of age.
- Have worked for the business during any three of the past five years.
- Have earned the $500 annual minimum required compensation.
Spouses and children may also participate in the plan and open their own SEP IRAs—as long as they are employees of the company and meet the income requirements.
Distributions
- 59 ½ - 70 ½ - No tax penalty.
- Over 70 ½ - Distributions must begin by April 1 of the year following the year the individual reaches age 70 ½; and for subsequent years, distributions must be taken by December 31st.
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