SEP IRA – Simplified Employee Pensions
A SEP IRA will provide those who are either engaged in small business or self-employed, a pension plan that will be simple for them to administer. The SEP will allow the employer to set up an IRA for their employees, while contributing funds to an employee’s IRA, directly.
To qualify for a SEP IRA, the minimum participation age for an employee is 21 years old and for a minimum of three of the last five years, they must have been employed.
In addition, they need to have received a minimum of $550 for the current year’s compensation.
Contribution Limits to SEP IRA
According to the SEP IRA rules, an employer is allowed to contribute a maximum of 25% of the employee’s income to the employee’s SEP IRA, on an annual basis, with a cap placed at $53,000 (for the year 2016) for each employee. All funds that have been deposited to an employee’s
All funds that have been deposited to an employee’s SEP IRA belongs to that employee.
Each employee may be allowed to contribute a maximum of $5,500 of non-SEP contributions for the tax year 2016 (or if 50 years of age or older – $6,500). This is also the total amount contributable for an employee, per year, for Traditional, Roth, and SEP IRAs.
This is also the total amount contributable for an employee, per year, for Traditional, Roth, and SEP IRAs.
Contributions to an individual’s SEP IRA are tax deductible, and their earnings are considered tax sheltered. This makes the contribution withdrawal rules similar to those of Traditional IRAs.
SEP IRA distributions may start after the investor reaching the age of 59 ½. and must start by the first of April (April 1) of the next year that follows the year that the investor has reached the age of 70 ½.
After age 70 ½, there is a 10% penalty tax assessed to withdrawals below the required minimum (RMD).
Withdrawals that are made prior to age 59 ½ are assessed a 10% penalty unless the withdrawal is due to disability, death, first-time home purchase (up to $10,000 maximum), immediate family higher education costs or approved medical expense costs that exceed 7.5% of the contributor’s adjusted gross income (AGI).
Should the taxpayer exceed the amount of the maximum allowed contributions, then a 6% penalty tax is assessed on those over the limit funds that have not been withdrawn by the time the contributor has filed a tax return (but not later than April 15