Is a SEP-IRA Right for You?

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A Simplified Employee Pension Plan (SEP-IRA) is one of the easiest small business retirement plans to set up and maintain and offers flexibility to vary contributions from year to year or even skip it. There's little administration for you to do, and tax filing isn't required. For that reason, SEP-IRAs are attractive for sole proprietors and small companies.

Eligibility

Nearly all small businesses can establish a SEP-IRA, including:

  • Self-employed individuals
  • Multi-person corporations
  • Sole proprietorships
  • Partnerships
  • S and C Corporations
  • LLCs
  • Tax-exempt organizations

The business must have no more than 100 employees.

Advantages

Contributions are tax-deductible and earnings grow tax-deferred and are not taxed until you withdraw funds (after age 59½).

A SEP-IRA has broad appeal due to its high annual contribution limits, the fact that annual contributions are flexible and completely discretionary, and because it requires minimal administration.

Contributions and withdrawals

In 2010 and 2011, a SEP-IRA has a contribution limit of $49,000. The maximum annual compensation on which contributions can be based is $245,000 for 2010 and 2011. For self-employed people, compensation means earned income.

Contributions to a SEP-IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow tax deferred. Withdrawals after age 59½ are taxed as ordinary income. Withdrawals prior to age 59½ may incur a 10% IRS penalty as well as income taxes.

Establishing a SEP-IRA

Generally a SEP must be established and funded by your tax-filing deadline (for corporations that would be March 15 unless there was an extension until September 15). Generally, filing an extension extends the period for establishing and funding the SEP plan. For a sole proprietor, April 15 is generally the deadline to establish and fund a SEP for the prior tax year. If an extension was filed, a sole proprietor can establish and fund a SEP-IRA by October 15.

Consult with a tax professional about your individual situation.

Open a PENSCO Trust SEP-IRA