This article contains information on the 2009 SEP IRA contribution limits.
Considering a SEP IRA
As a self-employed business owner, you may be looking for the right kind of plan to save for retirement. But it is easy to become overwhelmed about which is best for your situation or your company. For self-employed individuals, the SEP IRA may be one of the easiest accounts to set up and keep going. It may also be one of the less costly plans available to business owners. It certainly requires much less time spent on paperwork than a traditional 401k account.
A SEP IRA account has many advantages over other kinds of retirement accounts but only after carefully considering the pros and cons against other types of retirement accounts should you make the decision. If you are an employee of a small business or if you yourself are self-employed, you are eligible to be enrolled in this kind of account. Only the employer will make contributions to the account.
What is a SEP IRA?
The SEP in the SEP IRA stands for ‘Simplified Employee Pension’. This account is essentially like a traditional IRA account but it allows for much higher contributions. Each eligible person will have an account opened on their behalf.
The SEP IRA has several benefits in addition to the higher contribution levels, including the ease of set up and account maintenance, and the ability to be 100% vested once the SEP IRA account is established. A SEP IRA account contributions are also tax deductible on income taxes. The investments made are tax-deferred until the funds are withdrawn.
A business owner with or without employees can establish a SEP IRA.
Who Needs a SEP IRA?
A SEP IRA account may be the right option for employers who want to contribute high amounts to their own retirement accounts as well as contribute to partners in company or employees in a small business. You are eligible to make contributions to a SEP IRA if you are a business owner, a part of a partnership, or a sole proprietor. You are also eligible for this type of retirement account if you earn any income from self-employment even when you have a full time job elsewhere and are enrolled in another retirement plan.
An advantage to having a SEP IRA account is that unlike other plans, there are no limits regarding your income level. Part time employees who are 21 years or older and who have worked three out of the previous 5 years and earned $500 or more yearly must be covered by the plan. Employers can choose to provide coverage for employees under the age of 21 at their own discretion.
SEP IRA Rules
A SEP IRA account must be set up and funded by the tax filing deadline of the sole proprietorship or the business if it has been incorporated. In order to get a SEP IRA established, you must have an agreement in writing to make provisions for eligible employees.
The owner of a self-employed business is considered to be an employee when relating to a SEP IRA account, as well as an employer. There is an agreement form, Form 5305-SEP, available from the IRS. Unlike a traditional 401k retirement account, you can not borrow against the funds in a SEP IRA account.
SEP IRA Contribution Limits
The amount of a SEP IRA contribution is capped at 25% of compensation. In 2009, the contribution allowance was up from $46,000 to $49,000 annually. Contributions are not mandatory in every year where there is a net profit. You also do not need to maintain a certain level of contributions. You have the freedom to make the choice, for instance, you can make the full amount contribution one year and then only a smaller percentage the following year.
You can also contribute nothing at all in that following year even if there was a net profit. For employees that have a SEP IRA account, the money is yours once the employer makes an account contribution. Only the employer makes contributions to the account.
Find a Good SEP IRA Calculator
If you are considering a SEP IRA account but are not completely confident that it is the right account for your retirement savings or your business, you can check your actual figures by using a calculator specific to the SEP IRA account.
There are several retirement fund calculators available online such as this SEP IRA-specific calculator or this contribution calculator at Individual401k.com. Enter your information to see if this kind of account is right for your situation and your retirement savings.
Where to Open a SEP IRA?
SEP IRAs can be established at a bank, mutual fund, brokerage house, or any other financial institution. An SEP IRA account can be established for a business typically within a day after the agreement form is completed.
Again, there are many options available for retirement accounts for small business owners and the self-employed. Compare the SEP IRA to other traditional retirement accounts to see which has the most advantages for your situation.
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{ 3 comments }
PT,
Aren’t there different rules as to when you can open one? End of year vs. End of Tax Year?
One thing you forgot to mention is that a SEP IRA may require you to start accounts for your employees. So, if you are an Entreprenuer who wants to contribute to your own retirement, but not all of your employees, a SEP IRA may not be ideal.
I’m not an accountant or tax specialist, so you should check it out yourselves first. But, I believe the contribution laws for a SEP changed around 1997.
My apologies, it looks like you did cover this under your section on SEP IRA Rules.
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