What Are the Rules for SEP IRAs?


Quick Answer

The rules for Simplified Employee Pension Individual Retirement Accounts include allowing any type of employer to implement an SEP IRA and allowing employees to use the same account for their SEP IRA and traditional IRA, Investopedia explains. Additional rules include treating deposited SEP contributions as traditional IRA assets.

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Full Answer

An SEP is a type of retirement plan that allows the employer to make tax-deductible contributions that fully and immediately vest, Investopedia states. Although SEP contributions are not taxed, distributions from the account and any accumulated earnings are taxed. Eligibility standards for employees include being 21 or over, having worked for the employer for at least three out of the last five years, and annually earning $550 or more. Financial institutions, with some exceptions, allow any traditional IRA account to receive SEP contributions.

Contributions to an SEP IRA are made on a discretionary basis and are not mandatory in any given year, and their maximum annual amount is capped, the U.S. Department of Labor explains. An SEP IRA contribution cannot be higher than either 25 percent of the total compensation paid out to the employee that year or a specific figure that varies based on cost-of-living estimates, whichever is lower. The option chosen must be the same for all plan participants, and if any participant receives a contribution, all participants who have done any work for the employer in a given year must also receive it.

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