Everyone worries about the future at some time in their lives, wondering how they will live during retirement. This can be especially true for those who are self employed. A SEP, which is often referred to as a Simplified Employee Pension Plan or Self Employment Pension Plan can be the answer for those who are self employed or have significant income from sales, business, consulting, or moonlighting for another small business.
SEP s can be set up by partnerships, limited liability corporations, sole proprietors and incorporated businesses for their employees as well. For employees to be able to participate in the SEP program they must be twenty one or older and have worked in any capacity for the employer in at least three of the last five years. A person can contribute as much as 15 of their earned income in any given year if they are an employee of their own corporation and between 13 and 14 in other circumstances.
A SEP is one of the easiest retirement plans to set up and has more flexibility than any other retirement savings plan available. There is little paperwork required in order to set up a SEP plan and there is no annual reporting required. There is great flexibility in how much and when you decide to contribute. In fact it is entirely up to you. There is no minimum amount and you are not required to make annual contributions.
Another benefit of the SEP plan is that there is no maximum age limit for contributing as there is in many retirement plans. As long as you still have earned income you can continue to contribute to your SEP plan. You can also use your tax refund to contribute to your SEP if you decide to use the extension time available.
There is often no charge for setting up a SEP, though some financial institutions will charge a nominal fee to do so. There may be a small custodial fee charged by the bank or financial adviser who is overseeing your SEP but this again is much less than the fees associated with many plans.
When you decide to withdraw money from a SEP you will be required to pay taxes on that money. If you take the money out after the age of 59 ½ then you will be required to pay your normal income taxes on that amount of money. If you decide to take money out of your SEP prior to reaching the age of 59 then on top of the regular income tax rate you will be charge 10 by the IRS as an early withdraw penalty fee.
There are some extenuating circumstances in which the IRS will not charge this 10 fee. These can include, if the IRS criteria are met: Buying your first home, if you become disabled, have certain medical expenses that are not covered by an insurance plan or reimbursable, have post secondary education costs, or to cover the cost of medical insurance.A SEP is a wise choice for many Americans who are concerned about their retirement and who qualify for the program. It is a good idea to discuss this option with your financial advisor to see if it is the appropriate savings plan for you or your business.
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