SEP IRAs
SEP is a Simplified Employee Pension plan. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SEP, employers make contributions to Traditional Individual Retirement Arrangements (IRAs) set up for employees (including self –employed individuals), subject to certain limits.
To establish a SEP, you:
- Can be a business of any size, even self-employed.
- Must adopt a SEP plan document.
- Generally cannot have any other retirement plan.
Advantages:
- Easy to set up and operate - usually just a phone call to a financial institution gets things started.
- Administrative costs are low.
- Plan can have flexible annual contribution obligations – a good option if cash flow is an issue.
Under a SEP, the employer makes contributions to Traditional IRAs (SEP-IRAs) set up for each eligible employee. A SEP is funded solely by employer contributions. Each employee is always 100% vested in (has ownership of) all money in his or her SEP-IRA.
How does a SEP work?
Jed works for the Quincy Chintz Company. Quincy decides to establish a SEP for its employees. Quincy has chosen a SEP because the chintz industry is cyclical in nature, with good times and down times. In good years, Quincy can make larger contributions for its employees and in down times it can reduce the amount. Quincy knows that under a SEP, the contribution rate (whether large or small) must be uniform for all employees. The financial institution that Quincy has picked to work with for its SEP has several investment funds for the Quincy employees to choose from. Jed decides to divide the contribution to his SEP-IRA among three of the available funds. Because only employer contributions are permitted, Jed cannot also make contributions under the SEP.
