It is important to understand the criteria when learning the ins and outs of a SEP-IRA. So, exactly what is a SEP-IRA? Simply put, “SEP” stands for “self-employed person” and it is one type of IRA that’s available to create in the U.S. An SEP-IRA holder may use the SEP funds in the same fashion as with other IRAs. There are no administration costs involved for self-employed persons who have no employees, but for the self-employed person with employees, all employees are entitled to receive similar benefits in a SEP plan. To know more about the definition of SEP and SEP-IRA rules, read the guidelines below.
What is a SEP-IRA: A Retirement Guide Inside Your IRA
In this article:
- Who can participate in the SEP Plan?
- What is an SEP-IRA?
- What is a Traditional SEP-IRA?
- What are the SEP-IRA Contribution Limits?
- When to Open an SEP-IRA and When is the Contribution Deadline?
- Where to Open an SEP-IRA?
- Why should you open an SEP-IRA?
- How to Open an SEP-IRA?
1. Who can participate in the SEP Plan?
An SEP or Simplified Employee Pension plan enables business owners to make contributions for the retirement of their employees in a simplified way. The employee eligible to apply for an SEP plan should satisfy certain requirements: 1) They should be at least 21 years old, 2) Have been employed for no less than three years for the last five years, and 3) Received $600 minimum for their compensation with their employers for the year (2017 and 2018).
These eligibility requirements also apply to self-employed individuals. However, do take note it is the employer’s discretion to include requirements for the plan which are less restrictive and cannot include requirements which are more restrictive though. Employees who are also ineligible for the plan are those bound by a union agreement and alien employees who are nonresidents.
2. What is an SEP-IRA?
The SEP doesn’t require a start-up or costs for operation similar to a conventional retirement plan. It allows for contributions up to 25% of every employee’s salary. These contributions go to the IRA (Individual Retirement Account) or Annuity. This is set up for every participant of the plan now called SEP-IRA.
3. What is a Traditional SEP-IRA?
The SEP-IRA is classified under the rules governing Traditional IRAs, and can’t be set up as a Roth IRA. It follows the rules for Traditional IRAs including distribution, investment, and rollover. The employer is the only one who contributes to the SEP-IRAs under the Traditional IRAs. The employee will have 100% ownership of the entire SEP-IRA funds.
4. What are the SEP-IRA Contribution Limits?
The contribution limits for the employee’s SEP-IRA should not go beyond the lesser of 25% of an employee’s salary, or $55,000 and $54,000, for 2018 and 2017 respectively. However, SEP plans do consider salary deferrals, which are elective and catch-up contributions. If, however, you have exceeded the maximum limits allowed, there is a SEP Plan Fix-It Guide to help you fix it.
5. When to Open an SEP-IRA and When is the Contribution Deadline?
It is possible to open and make contributions to an SEP-IRA anytime up until the actual tax-filing deadline. This includes any extensions. Generally speaking, this will usually be on April 15th, so you must make contributions up until that deadline in order to contribute for that tax year.
6. Where to Open an SEP-IRA?
Setting up an SEP-IRA can be made with insurance companies, banks, and any other qualified financial institutions. You may send contributions for an SEP to the financial institution maintaining your SEP-IRA. Every eligible employee should have a Form 5305-SEP, instructions, as well as other information found in the form. Take note that for the IRS model SEP, the eligible employee should have the information for it to be adopted.
7. Why should you open an SEP-IRA?
SEP plans can add to your list of sources that provide additional income. It allows opportunities for both the employers and their employees to save money for their retirement accounts. Another advantage of setting up an SEP-IRA is its higher contribution limit. In 2016, for example, business owners could make contributions up to 25% of their income.
8. How to Open an SEP-IRA?
There are only 3 basic steps when setting up a SEP. First, a written agreement formally stating all employees who are eligible will get benefits is required. Second, you have to provide every eligible employee relevant key information about the SEP. Lastly, the SEP-IRA can be set up by or for every employee who’s eligible.
Knowing the essential details of an SEP-IRA can result in a hassle-free application. However, you should research SEP-IRA rules to completely familiarize yourself with the guidelines.
Which guidelines on what an SEP-IRA is all about you would like to know more? Please share your thoughts in the comments section below.