A Simplified Employee Pension plan, or SEP, provides small businesses with a low-cost way of contributing to their employees' retirement — and, if self-employed, to their own retirement — without shouldering the administrative costs of a 401(k) or defined benefit plan. Under a SEP, contributions are made directly to an IRA or IRA Annuity set up for and managed by each employee.
Most of the same rules governing Traditional IRAs also apply to SEP/IRAs. Specifically the minimum, no-penalty withdrawal age of 59½, and the required minimum distributions beginning at age 70½. Since the money contributed to a SEP/IRA is pre-tax, distributions will be taxed at whatever rates are in effect for the owner's bracket during the year of distribution.
One of the benefits of a SEP/IRA for employees is the high contribution limit. The 2009 and 2010 contribution limits for eligible employees are the lesser of either $49,000 or 25 percent of total employee compensation. For example, an employee earned $50,000 for 2009. The maximum contribution the business owner can make to the worker's SEP/IRA is $12,500 (25 percent x $50,000). Contribution limits for the self-employed are not quite as straight forward but, barring limits, are approximately 18.6 percent of net profit.
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