The IRS explains a SEP IRA, or a Simplified Employee Pension (SEP) Individual Retire Account or Annuity (IRA), as a plan for business owners to “contribute toward their employee’s retirement as well as their own retirement savings.”
Free Retirement Calculator: When Can You Retire? — Click Here to Find Out
Advantages
A SEP IRA is set up to benefit small-business owners and self-employed individuals. The 2015 contribution limit is $53,000 and is completely tax deductible.
SEPIRA.com lists benefits of the plan as: high contribution limits, room for discretion and flexible contributions, and minimal administration.
Fidelity also lists growth potential and the tax-deductible contributions as other advantages. Fidelity also explains that, in the case of a small-business owner with employees, contributions are made by the employer with each employee receiving the same percentage (between 0 percent and 25 percent of compensation).
A SEP IRA differs from a SIMPLE IRA in that employees fund the bulk of a SIMPLE IRA and always has ownership of it, USAA explains. However, when looking at early withdrawals, the penalty tax is much lower, 10 percent for a SEP IRA as opposed to 25 percent for a SIMPLE IRA,
according to USAA.
How Soon Can You Retire? Free Test Shows You When — Click Here
CNN Money says SEP IRAs really benefit the business owner due to the funding flexibility. One year you can choose not to contribute, while another you can make a larger contribution, all based on the business owner’s discretion and the financial status of the company.
Can I Participate?
The IRS requires the employee to be at least 21 years old, to have worked for the business three of the last five years, and to have received at least $550 in compensation for that year. However, sometimes a new employee can immediately participate in the SEP plan depending on the specific, individualized requirements.
An Extremely Simple Way to Determine If You're Ready to Retire — Find Out Now