FAQs Regarding the SEP IRA

The SEP IRA is a retirement plan that can provide you with a lot of benefits for your company. If you are starting an SEP IRA, there is a good chance that you have some questions that need to be answered. Here are a few frequently asked questions regarding the SEP IRA.

Who Is Eligible for an SEP IRA?

To be eligible to start an SEP IRA, you will need to be a business owner. You could potentially be self-employed as a sole proprietor, be part of a partnership or have a corporation or nonprofit organization. The business has to have at least one employee even if you are the only employee of the company. This type of plan is often preferred by smaller organizations.

How Does the Setup Process Work?

Setting up an SEP IRA is traditionally a very simple process. You will have fewer costs in order to set up this type of account then you would with other qualified retirement plans. You will first need to execute a written agreement that says you plan on providing this type of account by a certain date. The most common way to do this is to use IRS form 5305-SEP. This form has all of the necessary information required to set up this type of account. However, you could work with your financial advisor in order to come up with a customized plan. You will then need to provide every employee with written information about the SEP IRA. You should tell them about the eligibility requirements and how the plan works. You will then need to make sure that you set up an account for each eligible employee.

Which Employees Are Eligible?

There are a few guidelines for determining whether an employee is eligible to have an SEP IRA. The first requirement is that they are over the age of 21. They also have to have made at least $500 for the year. They also have to have worked for the employer for at least three out of the previous five years. If an employee meets these requirements, you will need to set up an SEP IRA for him or her.

How Do Contributions Work?

Many people have questions about how SEP IRA contributions work. With this type of retirement account, only the employer can contribute to the individual retirement accounts. Contributions are made on a discretionary basis by the employer. Therefore, they can decide whether they want to contribute to the accounts in a given year. This allows the employer to withhold contributions during a down year for the business.

If the employer decides to contribute to the accounts, they have to contribute to them all equally. Therefore, if they put a certain percentage of their income into their own SEP IRA, they have to do the same for every other employee. The employer can contribute as much as 25 percent of an employee's salary for the year.

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