What is a SEP IRA?
Simplified Employee Pension
A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. Any business owner with one or more employee can open this type of IRA. With a SEP investment the funds are contributed by the employer on behalf of the employee, the employees are not allowed to make contributions. The money in this type of IRA is not taxed until it is withdrawn, which is similar to a traditional IRA plan.
This form of IRA has an elevated contribution limit compared to a traditional or Roth IRA. If you are a business owner and interested in starting a SEP IRA investment plan for your employees there are a couple things you should be aware of:
- the employee(s) must be at least 21 years of age
- the employee(s) must have been employed with the company for at least 3 of the 5 past years
- the employee(s) must have earned at least $550.00 in compensation in the last year
Employers don’t have to contribute to this type of IRA plan every year. As an employer however, if you do make a contribution in any given year you must also contribute to your own simplified employee pension IRA as well as every eligible employee’s SEP IRA.