02 Apr 2019

How to Qualify for SEP

How to Qualify for SEP

Those who are not on employer-sponsored retirement plans might consider a SEP IRA. SEP stands for Simplified Employee Pension and allows people to put money aside for retirement. IRA stands for Individual Retirement Account. It is important to understand what the plan is, how to qualify, how much to contribute, and how to set it up.

What Is a SEP IRA?

Self-employed SEP, SIMPLE, and Qualified plans allow individuals and small businesses to open retirement funds with a brokerage firm, mutual fund company, or bank. Account holders pay no or low annual fees.

A SEP is a basic retirement account that is similar to a traditional IRA. Contributions are tax-deductible, and the investments are tax-deferred up to retirement. Once the person retires, the distributions are taxed like regular income.

People do not have to contribute to a SEP IRA each year, and they have the option of combining a SEP IRA with a Roth IRA or a traditional IRA. Americans like the flexibility SEP IRAs provide.

How to Qualify

Self-employed and employed individuals qualify for a SEP if they are 21 years of age or older, have worked for the employer for a minimum of three of the last five years, and have received at least $600 in wages from the employer.

Employers have the option of using less restrictive requirements, but they cannot make the conditions more restrictive.

How Much Can You Contribute to a SEP IRA?

Individuals can put back up to 25% of their net income when contributing to a SEP IRA. The IRS puts a cap on annual contributions, though. The cap is $56,000 for 2019. The cap is increased each year to reflect cost-of-living adjustments.

Employers must allocate the same percentage for each employee. Employers who have contributed different percentages for employees need to correct the problem to balance the accounts for all employees.

How to Set up a SEP IRA

There are three steps involved in setting up a SEP.

First, the employer or self-employed individual must create a written agreement regarding the SEP. The agreement must include the:

  • Name of employer
  • Requirements for participation
  • Signature of the responsible official
  • Allocation formula

Use IRS form 5305-SEP to create this agreement. This form does not need to be mailed to the IRS upon completion.

Next, employers must provide employees with information about the agreement. The information must include:

  • A notice that the employer has adopted a SEP
  • Participation requirements
  • Allocation formula

Finally, the employer needs to set up an IRA account for all eligible employees. The money goes into a traditional IRA at a qualified financial institution, and then, the employees make their own investment decisions.

Safeguard Your Physical and Financial Health

A SEP IRA will help you safeguard your financial health.  You also need to take care of your physical health by getting health insurance. Call 1-855-614-5057 to speak to a licensed insurance agent about individual or small group health insurance plans. You can also get a free quote online. Compare the premiums, deductibles, and coverage options and choose your plan.

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