Year End Is the Time to Open a Small Business Retirement Account.

If you open a qualified retirement account by Dec. 31, you have until the day you file your taxes next year, including extensions, to make this year’s contribution.

Simple Small Business Retirement Account – The SEP IRA

Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.

  • Available to any size business

  • Easily established by adopting Form 5305-SEP, a SEP prototype or an individually designed plan document

    • If Form 5305-SEP is used, cannot have any other retirement plan (except another SEP)

  • No filing requirement for the employer

  • Only the employer contributes

    • To traditional IRAs (SEP-IRAs) set up for each eligible employee

    • Employee is always 100% vested in (or, has ownership of) all SEP-IRA money

Pros and Cons:

  • Easy to set up and operate

  • Low administrative costs

  • Flexible annual contributions – good plan if cash flow is an issue

  • Employer must contribute equally for all eligible employees

Who Contributes: Employer contributions only.

Contribution Limits: Total contributions to each employee’s SEP-IRA are limited.

Filing Requirements: An employer generally has no filing requirements.

Participant Loans: Not permitted. The assets may not be used as collateral.

In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59 1/2.

Source: Choosing a Retirement Plan: SEP

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