Preparing for retirement is a necessary segment of the work life. Many people get the process of setting up a retirement plan cumbersome. For small business owners especially, an easy plan to configured and operate is priceless. The SEP is that plan.
What is it?
SEP means Simplified Employee Pension while a SEP IRA means a Simplified Employee Pension Individual Retirement Account. It is created via small businesses on behalf of their employees or self-employed persons.
How does it work?
An account is configured for an employee (a SEP IRA) via the business entity or a self-employed person. The Employer then makes contributions to that account. These contributions need to be within the prescribed limits and they need to be uniform for all employees of a business entity. They are tax deductible and are invested with the IRA owner retaining substantial control over the investment. In the case of self-employed people the IRS has special rules that they need to follow.
Why configured a SEP?
SEP provides lots of advantages to its users.
* In the first place, its easy to set up.
* Once set up, its very easy to operate.
* Tax advantages include deductions on the contributions made to the accounts. However, the maximum deductible quantity is 25% of the compensation due to the participants of SEP. There are also exemptions from paying taxes on the earnings made from the contributions.
* Its accessible to small organizations and there’s freedom on the frequency of contributions per year.
* The cash belongs to the employee as soon as the employer makes the contribution to the account.
Specifics about Contributions
The maximum quantity that can be contributed to an account is 25% of the compensation of the participants, or $49,000.00, whichever is lower. One can only contribute money. Other forms of property like land are’t acceptable. Contributions can be made each year or not. Its left to the discretion of the employer.
For whom can a SEP be set up?
Any person of 21 years of age and above can apply for a SEP. They need to be an employee or self-employed. They need to have worked for at least three years in the preceding five years and they need to have received at least $550 in compensation from the employer in the preceding year.
How can you configured a SEP?
First of all, one need to get a trustee. This is a financial institution that provides this type of service. Next, one need to then proceed to configured the SEP. One can choose the IRS model. You will fill form 5305-SEP. You need to provide copies of the form to all legible employees in his business. A written statement need to also be provided to each employee. The plan can be configured time before deadline of the income tax returns of the employer.