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Self Employed Retirement Plans: SEP IRA Rules

written by: Trent Lorcher•edited by: Donna Cosmato•updated: 7/5/2011

You became self employed so you could free yourself from the tyranny of a job. Free yourself from your work by establishing a self employed retirement plan. Educating yourself on SEP IRA rules should help.

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    It's Time for a Self Employed Retirement Plan

    Self-employed individuals make, on the average, 70% more than employees. Don't waste that 70%. Put it to work in a self employed retirement plan.

    If you're self employed or a small employer (fewer than 10 employees) looking for an easy to administer retirement plan, look no further than a SEP (Self Employee Pension). A SEP is an IRA based plan to which employers make tax-deductible contributions on behalf of eligible employees. Self employed individuals, therefore, make contributions for themselves. Contributions to a SEP--as with a standard IRA--are tax deductible, but are taxed upon distribution.

    Any employer with one or more employees may establish a SEP. This includes self employed business owners, regardless whether he or she is the sole employee.

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    SEP IRA Rules

    Before establishing a self employment retirement plan, educate yourself on eligibility, contribution, and distribution rules.

    • Eligibility: Anyone who owns a business or is self employed may establish a SEP. If you have employees and contribute to your own SEP, you must contribute to your employees SEP. SEP IRA rules dictate that any employee who meets the following criteria must be eligible:
      • is at least 21-years old.
      • earns at least $500.
      • has worked for the employer at least 3 of the previous 5 years.
    • Employers may choose less strict eligibility requirements.
    • A SEP can be established with any brokerage firm.
    • SEP IRA rules permit contributions of up to 20% of net earnings up to a maximum of $46,000, much higher limits than a Roth or Traditional IRA.
    • SEP contributions are tax deductible.
    • SEP owners become 100% vested immediately.
    • SEP contributions can be made up until the tax-filing deadline for the previous year.
    • SEP distribution rules follow those for traditional IRAs
    • Distributions are taxed on withdrawal.
    • Distributions made before the SEP owner reaches 59.5 receive a 10% penalty unless funds are used for unreimbursed medical expenses, health insurance under certain conditions, for a disability, for qualified higher education expenses, for payment of an IRS levy, or for a first time home purchase for the IRA owner or eligible family member.