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SEP - Simplified Employee Pension

A Simplified Employee Pension (SEP) is a plan that allows an employer to make contributions toward the employees’ retirement plans without becoming involved in more complex arrangements. The contributions are made to a Traditional IRA of each participant of the plan, hence the term SEP IRA.

Instead of setting up a Profit Sharing or Money Purchase Plan with a trust, the employer can adopt a SEP agreement and make contributions directly to a Traditional IRA set up for each eligible employee.

Participants under the SEP may establish their own IRAs at the institutions of their choice. As the underlying account is an IRA, covered employees may have Self-Directed IRAs as their SEP IRAs. They may do this in addition to any other IRAs they may have.

Roth IRAs are not eligible to be SEPs, however, IRAs to which SEP contributions have been made may be converted to Roth IRAs.

SEP IRAs Contribution Limits as of 2006 are limited to the lesser of the following amounts:

1. 25% of wages/ compensation
2. $44,000

If contributions are made, they must be made in accordance with set rules, which may be different for each situation.

Employees can contribute to a SEP-IRA independent of employer SEP contributions. They would be deducted in the same way as contributions to a regular IRA. However, the deduction may be reduced or eliminated because, as a participant in a SEP, the employee is covered by an employer retirement plan.

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