Learning about Simplified Employee Pension (SEP) Plans

These plans are associated with small businesses, and although your employer is responsible for the majority of contributions in the plan, you may be permitted to contribute as well. If you contribute to the pension, you may have tax deductions associated with that amount. These pensions are distributed in one-time or monthly payments after you retire, and withdrawals are taxed as current income. Finally, your company is subject to minimal costs and reporting requirements.

The Function of SEPs
Your employer creates an IRA in your name and funds the account with the SEP limit in mind, which is the lower of a quarter of your compensation or $45,000 annually. In addition, these contributed funds are excluded from the definition of current income. This fact benefits the employer while providing you with savings for the future.

Employee Contributions
You are permitted to contribute $15,500 to the SEP through a pre-tax salary reduction, also known as SARSEP.

Benefits of SEPs
1. Low cost to establish
2. Simple reporting
3. $15,500 annual employee contribution rate exceeds IRA limits
4. Contributions are fully vested immediately = Easy transfers

This information is presented to educate the reader and does not constitute professional tax and legal advice.

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