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[S490]Simplified Employee Pension Plan

by Jeff Mcleod, Jef

Do you work for a small business or for yourself and want to know if you will be safe and secure when you retire? Small businesses or self-employed individuals can provide benefits so you or the individual can have peace of mind. They can set up Simplified Employee Pension (SEP) plans. A SEP plan allows an employer to make contributions toward an employees' retirement, and if self-employed, his or her own retirement.

The SEP rules permit an employer to contribute and deduct each year to each participating employee's SEP-IRA up to 15% of the employee's compensation or $30,000, whichever is less. Bonuses and overtime are included in the employee's compensation. Simplified Employee Pension Plans are funded by employer contributions only. A self-employed owner's contribution is based on net profit minus one-half- self-employment tax minus the contribution for him or herself. To determine the contribution and deduction amount you must see IRS Publication 560 which is used for Retirement Plans for Small Businesses.

What makes an employee eligible for a SEP? The employee must have worked for the employer for at least three of the last five years, they must be at least 21 years of age, and has received from the employer at least $400 in compensation in the tax year. An employer can establish less restrictive participation requirements for its employees than those listed, but not more restrictive ones. The eligibility rules must be applied on a persistent basis to all employees including self-employed individuals.

Simplified Employee Pensions is one way that small businesses can provide retirement for their employees. There are several ways that one can plan for the future. Any employer can establish a SEP. The investments are managed by the each individual employee. Simplified Employee Pension plans are very easy to set up and will make you feel better knowing that you have something to look forward to when you decide to retire.

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A Simplified Employee Pension (SEP) plan provides a mechanism for the employees to save for their financial needs after the retirement. It also provides the employers with a simplified means of contributing towards the post-retirement financial needs of their employees, and their own, if they are self-employed. In case of a SEP, the contributions are made directly to an Individual Retirement Account (IRA) or an annuity that is created for every individual employee. When the SEP contributions are made into an Individual Retirement Account (IRA), it is collectively referred to as a SEP-IRA. The two terms SEP and SEP-IRA are commonly used interchangeably to denote the same account held by the employee. A Simplified Employee Pension (SEP) plan is a variation of the Individual Retirement Account (IRA). The SEP-IRA is famous because of its simplicity that is also reflected in its name. All employees of an organization are entitled to equal benefits under a SEP plan. SEP accounts are treated as being equivalent to IRA accounts and funds can be invested in a SEP account in the same way as in the case of an IRA. The administration costs of SEP accounts opened by self employed people are close to nothing owing to the simplicity of this retirement plan.

Since SEP plans are tax-deferred investment instruments, the funds saved in a SEP-IRA plan are taxed at the standard income tax rates when an employee makes qualified withdrawals after reaching an age of 591/2. It should be noted that the traditional IRAs are also governed by the same rule. The monetary contributions to a SEP plan are tax-deductible. In other words, the contributions are reduced from the gross taxable income for a particular financial year. This way, the contributions made to SEP-IRA plan help in reducing the income tax liability of a taxpayer during the same financial year. In order to become eligible for the employer's SEP-IRA plan, an employee must fulfill the following criteria:

1. The employee must be at least 21 years of age.

2. The employee must have worked for the employer for a minimum of three years in the last five consecutive years.

3. The employee must have earned at least $450 in compensation for that tax year.

Thus we can see that a SEP is nothing but a simplified version of an Individual Retirement Account (IRA) that is established by the employer to help the employees in meeting their financial needs after retirement. The employees must meet certain criteria in order to become eligible for their employer's SEP-IRA account. A SEP account entitles all the employees to equal contributions irrespective of their designation within the organization. This plan doesn't differentiate between different employees of an organization since all employees deserve to be equally able to take care of their post-retirement financial needs that are fulfilled by saving regularly in a retirement plan such as a SEP-IRA account provided by the US government. It helps the government in meeting its social obligation of providing a financial cover to the citizens.

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Both Jeff Mcleod & Mike Power are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Jeff Mcleod has sinced written about articles on various topics from Finances, Mortgage and Humour. . Jeff Mcleod's top article generates over 2400 views. to your Favourites.

Mike Power has sinced written about articles on various topics from 401K, Finances. Mike Power Business Consultant . Mike Power's top article generates over 5400 views. to your Favourites.