Simplified Employee Pension Plan (SEP)

Simplified Employee Pension Plan (SEP)

Definition

A retirement plan that an employer or self-employed individuals can establish. The employer is allowed a tax deduction for contributions made to the SEP plan and makes contributions to each eligible employee’s SEP IRA on a discretionary basis.

Explanation

As the name implies, SEPs are simplified retirement plans. They are especially attractive to self-employed individuals for their low administrative burden and costs. Contribution limits to SEP IRAs are high, and contributions are immediately 100% vested. The same percentage of compensation must be made for every employee. The SEP IRA owner directs the investments. The employer determines if contributions will be made year to year. Eligible employees can make traditional IRA contributions to their SEP IRAs, allowing them to exclude income from their own individual taxes.

 

 

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