Simplified Employee Pension

A Simplified Employee Pension IRA is a pension plan established by a self-employed individual. The SEP IRA is a traditional style IRA that is owned and controlled by each employee.

• The employer must complete and sign a written SEP IRA agreement by the tax return date.
• The employer must give each employee a copy of this agreement and any other pertinent information.
• All eligible employees must open a SEP IRA at their institution of choice.
• The employer will decide what percentage of the employee’s income to contribute.
• The maximum contribution cannot exceed 25% of the employee’s income up to the compensation cap. The dollar limit is $40,000 beginning 2002.
• All contributions must be made by the employer’s tax return due date (plus extensions). Contributions can be made on behalf of an eligible employee even after they have reached 70 1/2. The employer will send a check payable to the employee's financial institution.
• Distribution rules are the same as for a traditional IRA.
• Small businesses are able to provide pension coverage to their employees with no administrative cost. Self-employed individuals can provide for their own retirement in the same manner. Even though a SEP IRA cannot be designated as a Roth, employees may still contribute to a Roth IRA on their own.