SEP IRA - 401k And Ira

SEP IRA

The SEP IRA (Simplified Employee Pension Individual Retirement Account) is one of the various types of Individual Retirement Accounts authorized by the US government. Generally SEP IRAs are adopted by small business owners to provide retirement benefits for the owners and their employees while limiting the amount of administrative work involved. Foa a self-employed person with no employees there are no significant administration costs.

If the self-employed person does have employees, then all employees must receive the same benefits under a SEP plan. Since SEP IRA accounts are treated as Iindividual Retirement AccountsRAs, the funds can be invested in the same ways as any other IRA. The funds are subject to regular income tax rates when qualified withdrawals are taken after age 59 and a half. This is the same rule that applies to so-called traditional IRAs. One of the major differences between SEP and traditional IRAs is that they are treated as part of a profit-sharing plan. Contributions made to a SEP IRA account are deductible, that is, they are in addition to wages earned but are not treated as taxable income for the tax year the contribution is made.

The SEP contribution can also be quite a bit more than what's allowed for a traditional IRA. For employees, an employer can contribute up to 25% (considering the limits) of the employee's wages. For example, if an employee earns $60,000 in wages, the employer could contribute up to $15,000.

However, the total contribution to a SEP IRA shouldn't exceed the smaller of 25% of wages (roughly 20% for self-employed before self-employed tax deduction is included) or $49,000 for 2009 and $49,000 for 2010. Contributions can be made to the plan up until the the employer's return is due for that year.

The actual calculations are somewhat complicated for the self-employed since the rates are based on net profits minus the deduction for self-employment tax not on net earnings (which includes the SEP contribution). For detailed information see the IRS's Pub560 - "Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)."

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