One of the best and most popular retirement plans for small businesses is the SEP IRA retirement plan. The SEP IRA retirement plan is an Individual Retirement Account (IRA) set up by the employer as a company's small business retirement plan and called the Simplified Employee Pension Individual Retirement Plan (SEP IRA). It is intended for sole proprietorships, partnershipss, corporationss, and LLCs.
Characteristics of the SEP IRA Retirement Plan
If you, as a business employer, are looking for a quick, easy, and low-cost retirement plan for you and your employees, the SEP-IRA small business retirement plan just might be for you. The employer has to set up the SEP-IRA retirement plan for the business. In turn, the employees have to set up their own Individual Retirement Accounts (IRA) to accept the employer's contributions. It is important to note that employees cannot make their own contributions to a SEP-IRA. That is done by the employer.
The SEP-IRA plan is a tax-advantaged plan for small business owners. If you are a self-employed individual, with no employees, in a profession such as consulting, you can deduct contributions made for yourself. If you own a small business, you can deduct contributions made for yourself and your employees.
Establishing the SEP-IRA Plan for Your Business
A SEP-IRA plan is easy to set up and you can probably do it yourself. If you would rather have someone else do it, contact a representative from a financial institution, your accountant, or your attorney. Even if you fill out the paperwork yourself, you have to choose a financial institution to administer the plan and serve as the trustee of the plan.
The federal tax form Form 5305-SEP must be completed to set up a SEP-IRA retirement plan.
The financial institution you choose to administer the SEP-IRA could be a mutual fund, pension fund, insurance company, bank, or other financial institution. This is an important decision since this financial institution will receive the contributions to the plan and invest them as well as provide the employees with end-of-year statements.
Contributions to the SEP-IRA Plan
You do not have to make a contribution to the SEP-IRA plan every year. You can make a contribution out of profits when you have a good year. When you have to pay taxes, you can actually make a contribute from a portion of the tax liability that you owe. SEP-IRA's are particularly good retirement plans for companies in cyclical industries.
In years when you do make a contribution, you have to make it to all employees who work for your company, depending on how you defined an employee in the form you filled out when you set up the SEP-IRA retirement plan.
The maximum contribution you can make for 2010 and 2011 is the smaller of $49,000 or 25% of the employee's contribution. Compensation is $245,000 in 2010 and 2011. Contributions to the SEP-IRA are tax-deferred. Income earned on the SEP-IRA, such as interest and dividends, are tax-deferred. If you or your employees wait until after they are 59 1/2 years of age to make withdrawals, then the money from a SEP-IRA is taxed as ordinary income. If a withdrawal is made before the age of 59 1/2, then the tax rate is the marginal tax rate plus a 10% penalty. Loans cannot be taken out against a SEP-IRA account.
Contributions to your SEP-IRA must be made by your company's tax deadline. If you file an extension, you have to make your contribution by the deadline of your extension.
Communication with Employees About the SEP-IRA Retirement Plan
If your business has employees, then you have to educate them about the SEP-IRA you have established. If you have a human resources department, that department can handle this. The first step is to give them a copy of Form 5305-SEP that you filed to set up the SEP-IRA.
In addition, the financial institution or trustee administering the plan should provide your employees with a non-technical explanation with how the SEP-IRA retirement plan works. At the end of each year, the trustee provides each employee with a financial statement estimating the fair market value of their SEP-IRA. If a distribution is made, the trustee provides the employee with the paperwork filed for that distribution.
Government Reporting Requirements
One of the things that are easy about setting up a SEP-IRA retirement plan is that the government reporting requirements are few and easy. The trustee has to file Federal Form 5498, IRA Contribution Information, with the federal government. If any distributions are made to employees, the trustee will send a Form 1099-R to both the employee taking the distribution and the IRS.
What do you do to Terminate the Plan?
The time could come when you want to terminate the SEP-IRA because you are going out of business or because you think another retirement plan will better suit your needs. All you need to do is notify the trustee or financial institution that administers the plan. You don't need to notify your employees, but it would be nice to do so.
Summary
There are other business retirement plans that may be suited for your business. If you are in the market to set up a retirement plan, understand all of them before you make this very important choice.
