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A simplified employee pension (SEP) plan is a business retirement plan
that allows employers to make contributions to an employee's individual
retirement account (IRA), and provides the employer with a tax deduction.
The employer's contribution is not regarded as income to the employee until
the time of distribution.
At First State Bank & Trust Company, we can help you set up a SEP plan
for you and your employer, so you can start saving for retirement today!
Who can contribute to a SEP?
Your employer can contribute to your SEP. The contribution can be made any
time before your employer's tax-filing due date. You may not make
contributions to your SEP, but the contributions your employer makes are
not considered income to you when the contribution is made, so you do not
pay income tax on the contribution.
Who is eligible for a SEP?
For your employer to contribute to a SEP Plan, you must establish a
SEP/IRA. Your employer may set some eligibility requirements, such as a
minimum age requirement to participate. Also, your employer may set a
minimum service requirement (cannot exceed three of the last five years),
and an employer can exclude certain non-resident aliens.
What are the contribution limits on an SEP?
Your employer may contribute from zero to 25% of your annual compensation
(generally the amount reported as wages on your W-2), up to a limit of
$49,000 annually. If your employer contributes more than the annual limit
to your SEP, it is taxable income to you the employee, and it is considered
a contribution by you to your personal IRA, subject to regular contribution
and deduction limitations.
I'm self-employed. Can I contribute to a SEP
for myself?
Yes. You may make contributions on behalf of yourself to a SEP. For
contribution purposes, your compensation is equal to the net profit from the
business, less one-half of the self-employment tax and the contribution
amount. Because of the complexity of these calculations, you should consult
with your tax or legal professional.
When can I withdraw my savings?
Distributions from a SEP are handled the same as distributions from a
traditional IRA. You may begin to make withdrawals at the age of 59½.
Distributions made before the age of 59½ are subject to early withdrawal
penalties.
Are my distributions taxed?
Yes. Distributions from your SEP plan are taxable as income in the year
they are made. A SEP, like a traditional
IRA, is a tax deferral plan, whereas distributions from a
Roth IRA can be tax-free. For more
information about a Traditional or Roth IRA, click
here.
Talk to your tax professional before starting a SEP plan.
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