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A Simplified Employee Pension IRA (SEP-IRA) plan is a type of workplace retirement plan that allows an employer to contribute tax-deductible dollars to the owner's and the employee's retirement account. SEP-IRA plans are funded solely by employer contributions (employee deferrals are not permitted) whereby each eligible employee generally receives the same percentage of their individual compensation amount, and that percentage is at the discretion of the employer from year-to-year.
SEP-IRA plans offer a range of benefits, including
A SEP-IRA plan can be established by any type of business, including a sole proprietor, partnership, limited liability company (LLC), corporation (S or C); a non-profit organization; or even a government entity. It's important to consider the rules around eligibility, contributions and distributions in determining the suitability of a SEP-IRA.
When an employer establishes a SEP-IRA, they must decide on the eligibility requirements of the plan – which will vary based upon their objectives. Everyone, including the business owner(s), is subject to these eligibility requirements.
An employer can set up a SEP-IRA with the following maximum eligibility requirements (but can choose to be more lenient):
Like other retirement savings accounts, certain individuals may be excluded from a SEP-IRA including:
Distributions from SEP-IRAs follow the same distributions rules as traditional IRA and are typically taxed as ordinary income. While a distribution can be taken at any time, a 10% penalty on pre-tax dollars will be incurred if the individual is under age 59½ and does not qualify for a penalty exception.
Generally, individuals must begin taking a required minimum distribution (RMD) from their plan in the year they turn 70 ½ (for individuals who attained this age in tax year 2019 or prior) or age 72 (beginning in tax year 2020) and each subsequent year. For SEP-IRAs, there is no exception to the RMDs rules for individuals who have not retired.
A SEP-IRA allows employers to make an annual contribution of the lesser of 25% of your eligible compensation or $57,000.
Applicable to employers with less than 100 employees, a SIMPLE IRA allows plan participants to defer up to $13,500 pretax or $16,500 if age 50 and older, with a required employer match up to 3% of compensation to contributing employees or a 2% contribution to all eligible employees.
An Owner-only 401(k) is available to businesses consisting solely of owner(s) and spouse(s) and may offer the ability to contribute more than the dollar limits of a SEP-IRA at the same compensation: 25% plus salary deferral contributions (pretax or Roth) of up to $19,500, plus a catch-up contribution of up to $6,500 if age 50 or older; maximum $57,000 or $63,500 if age 50 or older.
The low cost and simplicity of a SEP IRA can be appealing, but how do you know if it's right for you? Ask your financial advisor for more information about all the options available for your plan.
Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. Please consult your attorney or tax professional regarding your situation.