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What Are Simplified Employee Pension (SEP) IRA's

Oct 24, 2007
What are SEP IRA's?

A Simplified Employee Pension (SEP) plan provides a mechanism for the employees to save for their financial needs after the retirement. It also provides the employers with a simplified means of contributing towards the post-retirement financial needs of their employees, and their own, if they are self-employed. In case of a SEP, the contributions are made directly to an Individual Retirement Account (IRA) or an annuity that is created for every individual employee. When the SEP contributions are made into an Individual Retirement Account (IRA), it is collectively referred to as a SEP-IRA. The two terms SEP and SEP-IRA are commonly used interchangeably to denote the same account held by the employee. A Simplified Employee Pension (SEP) plan is a variation of the Individual Retirement Account (IRA). The SEP-IRA is famous because of its simplicity that is also reflected in its name. All employees of an organization are entitled to equal benefits under a SEP plan. SEP accounts are treated as being equivalent to IRA accounts and funds can be invested in a SEP account in the same way as in the case of an IRA. The administration costs of SEP accounts opened by self employed people are close to nothing owing to the simplicity of this retirement plan.

Since SEP plans are tax-deferred investment instruments, the funds saved in a SEP-IRA plan are taxed at the standard income tax rates when an employee makes qualified withdrawals after reaching an age of 591/2. It should be noted that the traditional IRAs are also governed by the same rule. The monetary contributions to a SEP plan are tax-deductible. In other words, the contributions are reduced from the gross taxable income for a particular financial year. This way, the contributions made to SEP-IRA plan help in reducing the income tax liability of a taxpayer during the same financial year. In order to become eligible for the employer's SEP-IRA plan, an employee must fulfill the following criteria:

1. The employee must be at least 21 years of age.

2. The employee must have worked for the employer for a minimum of three years in the last five consecutive years.

3. The employee must have earned at least $450 in compensation for that tax year.

Thus we can see that a SEP is nothing but a simplified version of an Individual Retirement Account (IRA) that is established by the employer to help the employees in meeting their financial needs after retirement. The employees must meet certain criteria in order to become eligible for their employer's SEP-IRA account. A SEP account entitles all the employees to equal contributions irrespective of their designation within the organization. This plan doesn't differentiate between different employees of an organization since all employees deserve to be equally able to take care of their post-retirement financial needs that are fulfilled by saving regularly in a retirement plan such as a SEP-IRA account provided by the US government. It helps the government in meeting its social obligation of providing a financial cover to the citizens.
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