IRA Rules
Individual Retirement Account Rules

IRA Rules And Information

 

SEP IRA Rules

Another type of individual retirement account is known as a Simplified Employee Pension or SEP. The SEP IRA Plan was designed for self employed individuals or small business owners. They can be used by owners of a Sole Proprietorship, Subchapter S Corporation, C Corporation, Partnership or LLC.


The reasons you may want to consider a SEP IRA are:

- High contribution limits - Currently up to 25% of total compensation (including bonuses) or $49,000 per year whichever is lower. This is much higher than the $5000-6000 limits for the Traditional IRA.

- Contributions are discretionary and completely flexible so the employer can contribute a greater percentage in good years and less in the poor years. An annual contribution can be made once at the end of the year when the results for the year are know.

- Very little administration required for a SEP IRA compared to 401k and traditional pension plans.


Unlike a 401k plan the employer makes 100% of the contribution on behalf of the employees, employees are not required to contribute to the account. Additionally, if the employer makes a contribution for their own account they must make the same % contribution for each eligible employee based on that employees salary/wages. For this reason this plan is best for employers who are sole proprietors or have a small number of highly valued employees.


SEP
 IRA Employee Eligibility Rules

All employees over the age of 21 who have earned more than $450 during the calendar year and have worked for you in 3 of the last 5 years. This applies to full time, part time and even seasonal workers who meet these criteria.


Employee SEP IRA Contribution Rules

In addition to the employer contributions all employees are still eligible to make traditional IRA contributions of up to the current IRA Contribution Limits. The funds can be deposited into the same IRA account as long as the SEP documents permit the transaction.  In some cases payroll deductions can even be implemented to make it easier for the employee to contribute on a regular basis.  You will need to check with your plan administrator to see what options are available as options do vary between different financial institutions.  These employee contributions are tax deductible to the extent that you do not exceed the modified adjusted gross income limits.

Catch Up provisions do not apply to SEP contributions made by the employer, however the employee who is 50 years old or more can may make catch up contributions to the IRA holding SEP contributions as long as it is allowed by the SEP documents.


SEP IRA Investment Options

A Self-Directed SEP IRA can offer a broader variety of investment options than most traditional IRA accounts. Personally I have access to Mutual Funds, Stocks, ETFs, Bonds, Stock Options as well as Futures and Futures Options. In some cases real estate or partnerships may also be included within a SEP Account. This is something you will want to discuss with the plan administrator as options will vary between financial institutions.


SEP IRA Withdrawal Rules

The rules governing withdrawals from a SEP IRA are similar to other qualified retirment plans.   Withdrawals from a SEP are treated as taxable income since the initial deposits were tax deductible.  Any withdrawal before the age of 59 1/2 will be subject to an addiitonal 10% penalty unless it meets one of the ira withdrawal penalty exceptions


SEP IRA Conversion Rules

Can a SEP be converted to a Roth IRA? Yes. You may convert a SEP IRA to a Roth IRA exactly the same way as you would with any Traditional IRA.. As with a traditional IRA the money in the account will have to be reported as taxable income. At the present time there are incentives in place to make the "Tax Bite" less severe. If you convert your SEP or any other Traditional IRA to a Roth in 2010 1/2 of the income will be recorded in the 2011 tax year and 1/2 in the 2012 tax year. Depending upon the size of your SEP account this tax advantage could make a substantial difference in your ability to handle the tax burden.

 

SEP IRA Employee Eligibility Rules
SEP IRA Contribution Rules And Limits
SEP IRA Investment Options
SEP IRA Withdrawal Rules
SEP IRA Conversion Rules

Health Savings Account Rules

 

 

For complete information regarding SEP IRA Plans please refer to IRS Publication 560