Allows an employer to make contributions to the traditional IRAs of his or her employees through a retirement plan, known as a SEP.
- If you own a business that employs three people (yourself included), you can set up a SEP as a retirement plan for your two employees and yourself.
- Each year, you make a tax-deductible contribution to each employee’s traditional IRA.
- Once the employee retires, he or she may begin withdrawing accumulated money which, at that point, is taxed as income.
- Any employer – including self-employed individuals – is eligible to set up a SEP.
- Contributions are tax-deductible; however, unlike Traditional IRAs, contributions may be made to the IRA of an employee who is over age 70½.
- Like Traditional IRAs, distributions will be taxed as ordinary income.
- A person must begin distributions by the first day of April following the calendar year when he or she turns 70½.
- Money withdrawn by a person under age 59½ may be subject to penalties.
- A self-employed person or an employee who is over age 70½ is eligible to benefit from a SEP IRA.
- Under a SEP, the IRAs must be set up for eligible employees in accordance with the 5305-SEP Agreement established by the employer.