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Get the Scoop on the SEP IRA Contribution

By Guest Author On May 20, 2011 Under Success Secrets

A Simplified Employee Pension Plan, generally known as a SEP, is really a particularform of Traditional IRA plan structured to benefit the self-employed individual and small businesses. The guidelines of the SEP plan outline how funding takes place and establishes the SEP IRA contribution limit. For the small business, the employer makes the selection on how much the compensation will be, between 0% and 25%. The compensation amount is equal for alleligible employees, so a 20% contribution to one employee’s account means everyqualified employee will also receive a 20% contribution. SEP IRA regulations allow forexcellentversatility on contributions. The employer can review the business’s net profits or take into account prevailing economiccircumstances prior to deciding on the amount and frequency of contributions, even having theoption of skipping years if necessary . An employee is defined as 21 years or older, having worked for the company for three of the past five years, and received at least $550 in compensation. If the business is a sole proprietorship, a partnership, or an LLC taxed as a sole proprietorship all deductions have to be recognized and funded by the employee’s tax filing deadline. For S and C corporations, funding mustoccur by the corporate filing deadline. A SEP plan for a small company permits the employees to make agreater contribution thanks to theincreased SEP IRA contribution limit, and many employees participate since contributions are taken from pre-tax income. The SEP IRA contribution cap is a generous $49,000 or 25% of income, whichever is less. The self-employed do not have traditional wages, butrather have net profits from the business. Self-employed individuals can contribute 20% or up to $44,000 of net profit to their SEP plan. There are many positive aspects to the SEP, including low administrationcosts and easy set-up, but perhaps the finest benefit is the chance to accumulate tax-deferred retirement savings swiftly, thanks to the high allowable SEP IRA contribution.

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