Before we go into SEP IRA rules let me first tell you what it is and who will benefit from it the most. SEP stands for simplified employer pension plans, so a SEP IRA is an IRA plan that can be utilized by owners of small businesses, partnerships or sole proprietors, Sub S corporations and also those of us who are self employed. The contributions that are allowed in this plan can go up to $49,000. It is the employers that contribute and not the employees. It is suitable for these businesses since the employers will want to make big contributions that are both for them as well as their employees. These companies can also use this plan to get workers who are highly skilled as most workers nowadays are looking for jobs with good benefits.
The SEP IRA rules state how the contributions will be calculated and this is that the employer will make the decision of what the compensation will be, between 0 and 20%. The SEP IRA rules require that the compensation percentage must be the same for the employees as well as the employer. The benefit of this to the employer is that the deductible amounts are tax free and the benefit for the employee is that they will not have to pay towards the plan but will benefit from it in the long run. SEP IRA rules also allow the contributions to skip years in the sense that it may be discontinued one year when the business is not doing so well and then can be reinstated when the business picks up. This makes it a very flexible plan and you will see why employees as well as employers will love to be a part of this plan. The rules also stipulates that any employee age 21 or older who has worked with the company in the present year or in the past 5 years, who has earned at least $450 should be included in the plan. So that means that you are entitled to this plan once you have made $450 that could be in a couple days or week of working at a company.
SEP IRA rules as it relates to deadlines
If the business is a sole proprietorship, a partnership or a LLC taxed as a sole proprietorship all deductions have to be recognized and funded by the employee’s tax filing deadline for each employee.
If the business is an S or C corporation or a LLC taxed as a corporation the deductions must be recognized and funded by the corporate filing deadline.
SEP IRA rules as it relates to When funds may be withdrawn
Persons can begin withdrawals at any time but those that are done before the age of 59.5 years will incur penalties on the amount withdrawn but must stat no later than age 70.5 As with other retirement plans, the SEP allows withdrawals at age 59 1/2 and requires distributions at age 70 1/2. Exceptions to this rule are if the money is need for medical expenses or educational expenses as well as others.