Last week, we begin with an introductory discussion of the different types of retirement plans, more specifically SIMPLE IRA plans. This week, we will be discussing SEPs (Simplified Employee Pension Plans).
The Internal Revenue Service describes SEPs as a retirement plan that “allows employers to contribute to traditional IRAs set up for employees…” These types of retirement plans were designed for self-employed persons or small businesses. The U.S. Congress created these retirement plans to enable small businesses and self-employed person to have an opportunity to become competitive with large corporate pension funds. However, they are available to all business types.
Employers can contribute the lesser of at least 25% of the employee’s annual salary up to $275,000 or the maximum annual limit of $55,000 into the tax-deferred account. The maximum level of compensation for eligibility for the employee is $170,000 per year. Once established, the employee becomes responsible for the direction in which investments are made. As with other retirement plans, SEPs are closely monitored by the Internal Revenue Service.
In order to be eligible, the employee must be at least 21 years of age, have received at least $600 in the past year and have been employed with the employer for three of the past five years. The employee is always 100% vested in the plan. If an employee decides to transition into another position at another organization, the funds contributed to the plan leave with them. In addition, the employee will receive a penalty of 10% additional tax if the funds are withdrawn prior to 59 1/2 years of age. However, there are a few reasons for which the IRS will waive these penalties:
- Unreimbursed medical expenses,
- Medical insurance payments,
- A disability,
- Distributions from an Inherited/Beneficiary IRA,
- Part of a SEPP Program (substantially equal periodic payments),
- Qualified Higher Education Expenses,
- To Purchase a First Home, and
- Payment of an IRS Levy.
Remember, planning for and researching the various types of retirement plans may appear to be overwhelming. However, the time you are willing to invest will be well worth the effort once you arrive at the moment wherein you transition into this phase of life. Next week, we will continue discussing the third financial goal of prioritizing our retirement accounts. In the upcoming weeks, we will continue to discuss the various ideas which could possibly assist each of us in attaining financial independence. I would appreciate any feedback from anyone as this is a community effort to living our best life in honor of the One Who has given us this life to live. Love God…love others….love yourself!
Sean Mungin, author of “The Thorn In The Flesh”