SEP Overview
A Simplified Employee Pension (SEP) is a retirement plan that a company issues to its employees. This simplified plan works better for corporations with smaller budgets, as the costs associated with its administration are significantly lower than other complex plans. When under this plan, employees place money into their normal IRA, or Internal Retirement Arrangements. The company will then forward that money to a company which regulates the SEP. The only difference is that each employee will have complete control and ownership over that IRA account, before the corporation inputs it into an SEP. This gives the employee the ability to manage those assets as they please. Those contributions are tax deductible and the earnings from them are considered tax-free.
SEP Processing
The corporation or company instituting the SEP is required to send the employee's contributions to the financial institution holding those SEP assets. The corporation must notify the financial institution if it acquires any new employees that wish to fall under its designated plan. Each employee has a specific SEP-IRA account that can receive funds. For the year of 2009, these contributions to an employee's SEP IRA cannot exceed the the lesser of $49,000 or 25% of his earnings for that year. There is no minimum contribution.
SEP Distribution
Employees are allowed access to their accounts at any time and have it taxed as added income for that given year. However, the funds are released free from taxes if transferred to another retirement IRA or account that permits the use of rollovers. Also, employees cannot borrow this money as a loan from the corporation's SEP-IRA. Like any other retirement plan, if that money is withdrawn before the age of 59 ½, it is taxed a penalty fee of 10 percent. Conversely, that money is obligated for withdrawal before the retired employee reaches the age 70 ½. If not, it will also incur a penalty fee.
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