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A SEP-IRA (Simplified Employee Pension-Individual Retirement Account) or Simplified Employee Pension plan, is a retirement plan available to self-employed people and small business owners. Eligible for establishing a SEP-IRA are sole proprietors, those in partnerships, and business owners of unincorporated or incorporated businesses, including S corporations. The owner must earn self employed income by providing a service.
A SEP-IRA is, in a word, simple. Start up and administration of the plan is less expensive than with traditional pension plans. There is relatively little paperwork to fill out, and no annual reports to the IRS are required. The deadline to start up and contribute to a SEP-IRA plan is the tax filing deadline of the business, which is typically April 15th.
The benefits of a SEP-IRA plan go beyond its simplicity. As with most retirement plans, the money is tax deferred until it is withdrawn. Contributions are flexible and do not have to be made every year.
The percentage contributed by the employer can fluctuate each year as long as it is the same for every employee. Up to 25% of an employee's compensation is allowable for the tax benefit, up to 44,000 US dollars (USD) for 2006. The maximum contribution, upon which the employer's contribution is based, is 220,000 USD in the year 2006.
There are few requirements that stipulate who is an eligible employee. An eligible employee must be at least 21 years old and must have performed service for at least three of the last five years. All eligible employees must participate, including part-time and seasonal employees. Employees that do not have to be included in the plan are: those covered by a union contract, non-resident aliens, and those who have earned less than 450 USD during the year.
A SEP-IRA can be rolled over into another SEP-IRA, a traditional IRA, or another qualified retirement plan that allows rollovers. An employee cannot take a loan from a SEP-IRA, but can make withdrawals. Of course, as with other retirement plans, the withdrawal is subject to income tax for the year it was distributed, but the penalties are relatively low.