Simplified Employee Pension Plans Offer Convenient Alternative to Traditional Retirement Programs
Simplified Employee Pension plans allow business owners, their employees and the self-employed to accumulate assets for retirement while reducing their taxes. Whether you are the owner or employee of a business, an SEP plan can allow you to take an active part in your retirement savings.
By Michael L. Brunner

Both employers and employees can benefit from a Simplified Employee Pension plan, an uncomplicated alternative to traditional pension plans.

Benefits to employers include:

Simplicity With an SEP, record keeping is minimal and most, if not all, administrative costs associated with qualified-retirement plans are eliminated. In addition, there is no annual IRS filing requirement once disclosure requirements are met. And because employees make their own investment decisions, your fiduciary responsibility is limited.

Contribution Flexibility As the employer, you have discretion over the amount and timing of annual contributions into your or employees' SEP accounts including the option to suspend contributions in a given year. SEP contributions must be allocated uniformly among eligible employees, with all employees receiving the same percentage of their compensation. The current maximum annual contribution is 25 percent of each participant's compensation (with a $205,000 salary cap), or $41,000, whichever is less.

Easy to Establish at a Low Cost The SEP is as easy to establish, as it is to operate. SEP plans have lower set up costs than most pension and profit-sharing plans. As an employer or self-employed individual, you have until your tax-filing deadline, including extensions, to establish and fund an SEP.

Tax Savings Employer contributions made to an SEP are considered tax-deductible business expenses, reducing dollar for dollar the amount of income subject to taxes. Also, the employer's contribution is excluded from employee's compensation, so it is not includable in taxable wages.

Tax-Deferred Growth. Contributions to an SEP account grow tax deferred. There are no taxes owed on interest, dividends or capital gains earned by employer contributions until withdrawals are made. Distributions made prior to age 59 and a half may be subject to a 10percent premature withdrawal penalty.

Benefits to employees include:

Investment Flexibility and Immediate Vesting Employees can benefit from a variety of investment choices within an individual SEP IRA account. A well-balanced portfolio can be built to suit individual risk tolerances and investment preferences. As objectives change, or the economic climate dictates an adjustment investment strategies, alternatives are available. All contributions to an SEP account are immediately 100 percent vested, including employer contributions and any traditional IRA contributions.

Comprehensive IRAs Recent legislation allows consolidation of different retirement plans such as a traditional or rollover IRA within an SEP IRA. In addition to an employer's SEP contributions, traditional IRA contributions can be made into an SEP IRA account. Although IRA contributions may not be tax deductible, they will grow tax deferred. By consolidating a traditional IRA with an SEP IRA, fees and paperwork may be reduced and tracking investments should prove easier.

Tax Deferred Growth Employer contributions into individual SEP accounts grow tax deferred. No taxes are paid on the interest, dividends or capital gains earned in an account until funds are withdrawn from the plan. Distributions from an SEP IRA account are taxable and may be taken at any time. Minimum distribution amounts are required of individuals older than 70 and a half.