SEP IRA Facts & Information

SEP IRA

Summary: Primarily used by small, closely held businesses and proprietorships, this IRA provides for the opportunity to defer a large portion of earnings into a pre-tax IRA, with little administrative costs. Within this plan, the employer makes all the contributions, and must contribute the same percentage of wages/salary to each eligible employee. Each employee establishes their own SEP-IRA account to hold and invest the employer contributions.

Eligibility: Any employer - including a sole proprietorship, partnership, corporation, and nonprofit organization - with one or more employees may establish an SEP plan. This includes a self-employed business owner, regardless of whether he or she is also the only employee of the business.

Contribution Limits: An employer may contribute up to 25% of the eligible employee's compensation, providing the contribution does not exceed $49,000.

Deductibility: Contributions are deductible for the employer, not the employee.

Distribution Rules: All withdrawals are taxed at the ordinary income tax rate of the IRA holder. Withdrawals before the age of 59.5 are normally subject to an additional 10% penalty.

Required Minimum Distribution: The IRS requires that you withdraw at least a minimum amount - known as a Required Minimum Distribution - from your retirement accounts annually, starting the year you turn age 70-1/2.