What Is A SEP Plan?

The self-employed individual has options in retirement planning, and understanding what is a SEP plan and its benefits may be helpful in making those important savings decisions.  The SEP or Simplified Employee Pension plan is a way for employers of small businesses or self-employed individuals to contribute money to an IRA or individual retirement account.

The SEP plan may be set up at financial institutions, brokerage firms, or through an insurance company.  The SEP contributions are placed into a traditional individual retirement account that is set up and marked as a SEP IRA plan. The SEP rules will apply to this account and only funds indicated as SEP funds will be deposited.

The self- employed individual or business owner must decide how much to put into the pension plan within the current limits allowed.  The current contribution rate is 0% to 20% of the net adjusted self employment income.  There are many online calculators to assist in determining the exact dollar amount.  It is also advisable to consult your tax accountant or financial advisor.  The amount of money being contributed to the SEP plan may be changed at any time and can even be suspended during difficult financial years. 

The contributions to a self-employed account are normally tax deductible as a business expense during the tax year that they are made.  The SEP IRA withdrawals will be taxed as regular income and may begin as early as age 59½ or as late as age 70½.  Any withdrawals prior to age 59½ will normally require payment of taxes and penalties on the amount withdrawn. 

Resources:

IRS