For small business owners looking for a way to save for their retirement or to provide an option to their employees, SEPs provide one viable option worth exploring.
What is an SEP? It is a Simplified Employee Pension plan. This type of plan provides employers with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA).
How much can you contribute? According to IRS guidelines, annual contributions of an employer to an employee’s SEP-IRA cannot exceed the lesser of:
- 25% of compensation, or
- $44,000 for 2006 ($45,000 for 2007 and subject to annual cost-of-living adjustments for later years).
The limits in the preceding sentence apply in the aggregate to contributions an employer makes for its employees to all defined contribution plans, which includes SEPs. Only up to $220,000 in 2006 ($225,000 in 2007 and subject to annual cost-of-living adjustments for later years) of an employee’s compensation may be considered. Contributions must be made in cash. Property cannot be contributed.
Any employer can establish a SEP and can maintain both a SEP and another retirement plan. A SEP can be set up for a year as late as the due date (including extensions) of the business’s income tax return for that year.
For more information, talk to your accountant or check out the IRS website.