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Chapter 4. No Plan Is an Island > Simplified Employee Pension-IRAs

Simplified Employee Pension-IRAs

Simplified Employee Pension-IRAs (SEP-IRAs) are designed for small businesses and are typically utilized by those with fewer than 10 employees. The nice feature about a SEP-IRA is that employers do not have to contribute each year and can make up for years when they don't contribute by overcontributing in subsequent years, subject to an annual maximum of 15 percent. Also, there is no vesting in SEP-IRAs, unlike 401(k) and other plans. Since SEP-IRAs started before the passage of the Small Business Job Protection Act of 1996, employees could contribute up to 25 percent of income to an annual maximum of $40,000 in 2003, indexed for future years. Indexing is a method of adjusting the maximum contribution to keep pace with inflation. Any SEP-IRA plan that started after the Act was passed will allow only employer contributions.

Be Careful

Self-employed business owners using a SEP-IRA have the same limit of 25 percent of income up to $40,000, but this must be calculated on net earnings and must include a deduction for half of the self-employment tax.



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