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As a self-employed or small business owner, you can secure your retirement and your employees with a Simplified Employee Pension (SEP) Plan.
A simplified employee pension plan is an Individual Retirement Account (IRA) that provides a streamlined approach to retirement planning for self-employed and small business owners.
The primary advantage of this pension plan is that it is easier to set up and has a lower operating cost than that of a traditional IRA.
SEP Plan Benefits
SEP Plan Drawbacks
Eligibility Requirements
An employee or a self-employed person who is eligible for a SEP plan:
Employers can relax some eligibility criteria but cannot impose stricter requirements.
Employee exclusions from the SEP plan are:
You can open a SEP if you are self-employed or a small business owner and want to secure a retirement option for yourself and your employees.
You can set up a SEP plan by filling out Form 5305-SEP or a prototype of the same. You can choose a financial institution or a broker with whom you want to set up the account.
Though not necessary, all employee’s SEP funds typically use the same financial institution.
SEP Plan Contribution Limits:
Employers can contribute to each employee’s SEP plan up to:
When you are self-employed, you also contribute to your plan as you treat yourself as both employer and employee. To determine the amount you can contribute and deduct, you will need to do the following:
Withdrawing From a SEP Plan:
Maintaining Your SEP Plan
You can maintain a SEP plan for yourself or your employees by opening an account with any broker or financial institution. The contribution so made would be invested in a wide range of stocks and shares, ETFs, mutual funds, and CDs to get the best returns on the investments in the long run.
Making Contributions
To maintain a SEP plan, you need to contribute to the fund anytime before the due date of filing your income tax return for the year.
After making the contributions, employees can make their own investment decisions. Your contribution to your employee’s SEP accounts is automatically vested in them.
To ensure your SEP operates as per the rules, you need to conduct an annual check-up.
Simplified employee pension plans are a simple way for self-employed people and owners of small businesses to have a tax-deferred benefit and a pension fund to secure their future after retirement.