What does SEP IRA mean? This is a common question among employees who know that they have a work related retirement account but have not heard of this acronym. A Simplified Employee Pension Individual Retirement Account is a retirement plan that employers can set up on behalf of their employees. There are specific rules that must be met by the employer and eligibility requirements for employees to participate in a SEP IRA.
Any employer interested in setting up a SEP IRA must follow certain guidelines. A simplified employee pension IRA must be set up by the employer at a qualified financial institution such as a bank or insurance company. This type of IRA is different than a personal IRA in the fact that it is marked as an SEP account. This means that only SEP funds from your employer can be contributed to the account. Each employee must receive a copy of the SEP form and its instructions by the employer. An eligible employee is someone who is at least 21 years old, has worked at least three out of the last five years for the employer, and has received a minimum of $550 in income.
There are many similarities between a SEP IRA and a personal IRA. There may be limits on the amount of money that can be contributed to the account each year, and there are specific rules pertaining to distributions when the employee reaches retirement age. Withdrawals are taxed as regular income after the age of 59½. Withdrawals before this age may bring about penalties by the IRS and immediate payment of income tax on the amount withdrawn. Mandatory distributions are required with the SEP IRA starting at age 70½, although the employer will continue to make contributions to the plan after this age as long as the employee remains working.