Ira Contributions

A Simplified Employee Pension IRA is indeed a simple retirement plan, in fact simpler than the Simple IRA. It is a plan ideally suited for self employed people. There are no real administration costs involved if you are self-employed and don't have employees. In case you have employees, they all receive the same benefits under this plan. SEP accounts are treated as IRAs. So, funds can be invested the same way as any other IRA.

An employee who is 21 years of age or older, who has worked for the employer for at least three of the previous five years and who has received at least $450 in compensation for the tax year becomes eligible for the SEP IRA plan.

SEP IRA contributions form part of a profit sharing plan. The employer may contribute up to 25% of the employees salary to the employee's SEP IRA account. The SEP IRA contribution limit for self-employed people is approximately 18.6% of the net profit. SEP IRA contribution limits are calculated not from the net profit but from the adjusted net profit. The adjusted net profit is computed as net profit minus the deduction for self-employment tax which is roughly 92.94% of the net profit.

The limit of 25% applies only to the wages and not the net profit. For example, if the employee earns $40,000 and the employer contributes 25% of that, $10,000, the employee has earned $50,000 in total. 20% of this amount goes to the SEP IRA.

The SEP IRA contribution limit is $45,000 in 2007. These contributions can be deducted from taxes and the profit from these investments grows tax deferred. Distributions after age the age of 59 ½ years is taxed as wages and distributions prior to this age will have to face an IRS penalty of 10% and will also attract income tax.

Participants can not avail loans from their SEP IRA. However withdrawals can be made at any time and these amounts can be rolled over tax free to another SEP IRA or traditional IRA. Distributions from SEP IRA, that are not rolled over to another plan is subject to income tax and will attract an additional 10% tax, if the withdrawal is made before the age of 59 ½.

As with other traditional IRAs, SEP IRA participants must start withdrawing a specific minimum amount by April 1st of the year after the participant turns 70 ½. The financial institution may notify the participant on January 31st of each year when a minimum distribution is required

SEP IRA has a broad appeal owing to the high amount you can contribute annually, at your discretion with high flexibility and negligible administration costs. No doubt, it can benefit a section of people, whom it is designed for.

Ira Contributions |