How to Set Up a SEP IRA

Simplified Employee Pension Individual Retirement Account or SEP IRA is a retirement plan under IRA. It is intended to benefit the self-employed individuals and the small business owners. This includes sole proprietorships, partnerships, corporations, and LLCs.

When you own a business, SEP IRAs should be established separately by you and any eligible employee. The employer’s contributions are then made into each eligible employee’s retirement plan.

If you are looking for an easy and low-cost retirement plan, SEP could be the answer. SEP can actually provide you a great source of income when your retirement comes. You are allowed to save money in your retirement account.

Under SEP, the employer contributes directly to traditional Individual Retirement Accounts (SEP IRA) for both the employer and the employees. SEP doesn’t have a start-up and operating costs of a conventional retirement plan. A contribution of up to 25% of each employee’s is allowed.

What are the advantages of a SEP?

  • SEP contributions are tax-deductible. Your business will pay no tax on the investments’ earnings.
  • You are not obliged to make annual contributions. Actually you can decide each year whether you would contribute and how much you would.
  • No documents are needed to be filed with the government.
  • Sole Proprietorships, partnerships, and corporations are allowed to set up SEP IRA.
  • You are eligible for a tax credit of up to $500 for each year of the first three years. This is for the cost of starting the plan.
  • The costs for the administrative are relatively low.

In establishing a SEP, there are few easy steps to follow.

  • Get in touch with a professional or a representative of a financial institution that do offer retirement plans. Choose IRS model of SEP (form 5305-SEP).
  • It can be established until as late as the due date, including the extension period of the company’s income tax return for the year that you want to establish the plan.
  • You need to choose a financial institution for your SEP, this is important. Usually SEP IRA trustees are banks, mutual funds, insurance companies that issue annuity contracts and other financial institutions that have been approved by the IRS.
  • Fill up and sign the form 5305-SEP. When done, the form becomes the basic legal document of the plan. Don’t send it to the IRS but instead you just use it as reference since the plan’s terms are in that document.
  • Render a copy of the form 5305-SEP (or any other plan documents) to your employees, including its instructions along with information regarding SEP IRAs.
  • The SEP model will not be considered adopted until each of the employees are provided with a written statement. This written statement should explain that
    • A SEP IRA may provide different rates of return. It contains different terms than the other IRAs they may have.
    • The SEP’s administrator will provide a copy of any amendment within 30 days of the effective date, in conjunction with a written explanation of its effects.
    • The participating employees will be receiving a written report of employer contributions made to SEP IRAs by the end of January of the following year.

2 thoughts on “How to Set Up a SEP IRA

  1. SEP IRAs, in my opinion, are excellent business retirement accounts for the self-employed with small or one-person businesses, They are easy to set up and maintain. The administrative costs are low. If you owe taxes, part of your tax liability is allowed to go into your SEP IRA. You can put money into your SEP IRA each year up to a maximum amount. You are not obliged, in a given tax year, to make a contribution to employees’ accounts if you have employees. Check them out if you are a small firm just starting up!

  2. SEP IRAs are considered an at work retirement plan which can result in you being disqualified from claiming an IRA deduction if you earn above a certain amount.

    Be careful. You may not want to lose your IRA deduction because you set up a SEP.

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