SEP IRA Rules

Rules, rules, rules. Rules are the cornerstone for any organizational tool and when it comes to planning for your retirement you are sure to run into a wealth of rules that will restrict your deposits and withdrawals. Since most people are involved in retirement planning with either a 401k plan or one of the five different IRA options, we are going to concentrate on what is known as a Simplified Employee Pension (SEP) IRA. SEP IRA rules can be many and they can be restricting but at the same time they offer great benefits, none the least high contribution levels. First, let’s freshen up on our SEP knowledge.

SEP IRAs are a specific form of retirement plan that small businesses/ employers set up for their workers. It is an IRS model plan that entitles each employee their own IRA account, run through the business that employs them. The employers have the option of making tax deductible contributions to employee accounts (up to 25% of gross income) and they are allowed tax deductions according to their giving. Employees benefit by having their own IRA set up with money being deposited for them and optionally by them. Now that we have covered the basic SEP IRA knowledge, let’s look closer at SEP IRA rules and regulations:

  • However much an employer deposits into their own SEP IRA account (percentage wise) they must deposit the same into each of their employee’s accounts. So, if an employer puts 25% (the maximum allowed) of their income into their own account they have to do like wise for all workers under them. For this reason SEP IRAs work best for the self employed.
  • As stated earlier, the maximum contribution allowed is 25% of gross income, which makes it the highest of any other IRA plan.
  • Employers can benefit with tax deductions on all of the money put into employee’s accounts and to their own as well.
  • Any distributions (conversions) made from a traditional IRA account to an SEP account have to pay a 10% fee on the total amount distributed before the age of 59 1/2.

Here are a few of the rules that employees themselves must cover:
  • Each employee participating in the SEP IRA plan must be at least 21 years of age.
  • Each employee must have worked at the particular institution for at least three out of the last five years
  • Each employee must make a minimum of $450 during the taxable year to be a part of the SEP IRA program.

    SEP IRA accounts are a useful form of retirement planning for those who are self employed or who have few employees working under them. Of course, before committing to any long-term financial plan you should understand the SEP IRA rules and regulations, along with your options dealing with other 401k plans and IRA accounts.