What is a Simplified Employee Pension (SEP) IRA?

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For starters, not all businesses can start SEP IRAs. These plans were created to encourage retirement benefits among smaller businesses that would likely not set up traditional plans. Examples of these types of businesses are sole proprietorships partnerships. There are also income restrictions and limitations. In 2019 the limit was $280,000 dollars. That increased to $285,000 in 2020.

SEP IRAs also do not allow participants to borrow against their vested assets, unlike many other retirement plans in which participants may borrow up to the lesser of 50% or $50,000 of the vested assets.

In many cases, employees who are covered in a union agreement that bargains for retirement benefits may be excluded from participating in a SEP IRA plan. Workers who are nonresident aliens can also be excluded as long as the employer does not provide U.S. wages or other service compensation.

Contributions held in a SEP IRA can be withdrawn at any time. However, be warned. They are subject to limitations and restrictions put in place on traditional IRAs. This means a withdrawal is taxable in the year it was received and subject to an additional 10% tax if the participant makes a withdrawal before the age of 59 ½.