When running your small business or company, managing your resources and maximizing its full potential is vital to its success. All expenses must be cost effective, and employees should get the best benefits at lower costs. In choosing a retirement plan for your company, a SEP IRA should fit the bill perfectly.
Simplified Employee Pension
What is a SEP IRA? A SEP is a retirement plan that gives employers a simple way to give contributions to their employees IRA accounts. In essence, the SEP is a profit-sharing plan, where employees can receive more contributions to their accounts if business is doing well.
In order for an employee to be eligible for a SEP plan, he or she should be at least 21 years of age, has worked for the employer for 3 of the last 5 years and has a minimum annual salary of $500. The employee will setup the IRA account which will fall under the SEP (SEP IRA).
In a SEP, employers make the contributions. These contributions are discretionary; an employer can choose to contribute or not, and is free to give the amount he or she prefers, provided that it is within the plan’s contribution limits of $49,000 or 25% of the employee’s annual salary, whichever is less.
In a SEP IRA, required withdrawals start at 70 ½. Compared to other plans where withdrawals start at 59 ½, the SEP IRA allows the invested money more time to grow. Any withdrawal made before 59 ½ is subject to a 10% early withdrawal penalty plus the amount withdrawn will be taxed as ordinary income.
Because of the SEP IRA’s flexibility, not only do employees reap the benefits of bigger possible contributions from the employer, employers also enjoy the convenience of being able to choose when to make their contributions, which can potentially save a business during times of low profits.