- The money you contribute to a SEP-IRA can be deducted from your business' taxes.
- You can change your contribution each year or choose to stop contributing.
- There are no papers to file with the government.
- Many financial services providers will not charge you a setup fee.
There are some drawbacks to the structure of a SEP-IRA, including:
- Contributions become the property of the employee immediately, so it's not possible to create a vesting schedule as an incentive for employees to stay.
- Workers can't make their own contributions to the plan.
Other retirement plans designed for small businesses include the SIMPLE-IRA, which allows employees to contribute a portion of their own salary to the plan. Self-employed workers may also consider a self-employed 401(k).
Contributions and Investments
For 2008, you can contribute up to 25% of your employees' compensation to a SEP-IRA, to a maximum of $46,000 per person. Unlike a Roth IRA, the contribution limits don't phase out for high-income workers.
Whatever plan you choose, you must apply it uniformly across all of your eligible employees. From there, your employees will choose from the investment options offered by the plan provider. At the financial services firm Fidelity, for instance, SEP-IRA account owners can choose from mutual funds, stocks, bonds, certificates of deposit and annuities.
The investments grow tax-free until the money is withdrawn, usually when the employee reaches the age of 59 1/2. Soon after the employee turns 70, he or she will be required to withdraw from the account, just as with other IRAs.
SEP-IRA contribution limits allow business owners to deposit no more than 25% of an employee's compensation, or $46,000 as of 2008 (which would equal an income of $230,000). The calculation must be done carefully, preferably with the help of a reputable, honest, and intelligent tax professional so as not to run afoul of IRS regulations.
Choosing a Provider
The provider of your SEP-IRA can be a bank, mutual fund company, insurance company or other institution that has received IRS approval. When making a choice, consider factors such as fees, ongoing expenses, investment selection and administrative support.
The plan trustee should help you complete the appropriate IRS form to establish a plan, called Form 5305-SEP, and guide you on communicating the details of the plan to your employees.
Disclosure is a key requirement of starting a SEP-IRA. You must inform your employees about the differences between the SEP-IRA and other retirement plans, and provide an annual written report about the contributions you've made. Once the plan is established, the trustee should take care of the day-to-day operations, processing contributions and investments, issuing statements and making any necessary filings to the government.
Eligibility
Once you select a percentage contribution, it must be paid to all employees who meet eligibility rules established by the government. According to the Department of Labor, an employee is defined as someone at least 21 years old who has "performed service for you" in three years over the last five years. This includes workers who have part-time or seasonal schedules. Employees who earn less than $500 in a year may be excluded.
For More Information
Fidelity provides descriptions of SEP-IRAs and other small-business retirement plans.
The Department of Labor has published an online booklet of instructions on how to establish a SEP-IRA plan.
The IRS provides a PDF file format version of its publication "Retirement Plans for Small Business."
