| A SEP IRA is a plan that may allow you to put away | | | | make deductible contributions as well. These |
| more tax deductible dollars for retirement. For | | | | contributions have the same contribution limits as |
| employers, SEPs are a simple way to establish a | | | | traditional IRAs. For 2006 and 2007, this is $4,000. If |
| retirement plan for employees without many of the | | | | you are age 50 or over, you can add another $1,000. |
| restrictions that apply to other qualified plans and | | | | However, if you make too much money, your |
| without the mounds of paperwork. | | | | contribution maximum is either reduced or eliminated. |
| Here, however, we are going to talk about how a SEP | | | | 6. You can be a participant in a qualified plan (for |
| IRA could allow you to save more for retirement if you | | | | example, a 401(k)) at work and still be able to |
| have self-employment income outside of your job or | | | | contribute to your SEP IRA based on your outside |
| have your own business. Business owners are both | | | | income. Again, this is a function of your income and |
| "employers" and "employees." For this discussion, we | | | | subject to the phase out rules discussed below. |
| will assume that you are the only employee. | | | | Phase-Out Rules |
| Note: If you are involved in a business with partners or | | | | 1. First, these rules apply if you are a participant in |
| employees, the same percentage contribution is | | | | another qualified plan. Note that having a SEP IRA puts |
| required for all employees who are over age 21, have | | | | you in this category. |
| worked in the business in at least three of the last five | | | | 2. Your income and your tax filing status determine the |
| years and made at least $450 (2006). Other | | | | phase-out. Technically, this is "modified adjusted gross |
| technicalities may apply. | | | | income" (MAGI) which is adjusted gross income with |
| The Rules | | | | certain adjustments. See your accountant. |
| 1. You can contribute up to 25% of your compensation, | | | | 3. If you file a joint tax return and have a MAGI of |
| subject to a maximum. This maximum is indexed; for | | | | $75,000 or less (2006), you can make a full employee |
| 2006 it was $44,000 and for 2007 $45,000. | | | | contribution: $4,000 or $5,000 if you are 50 or older. If |
| 2. Assuming the SEP IRA's tax year is the calendar | | | | your MAGI is over $85,000, no contribution can be |
| year, contributions can be made up until April 15th of | | | | made. A partial contribution formula determines the |
| the following year, when the tax return is due. | | | | maximum permissible contribution for incomes |
| 3. You can contribute up until you are 70 1/2, but not | | | | between $75,000 and $85,000. |
| beyond. | | | | 4. If you file a single tax return, you can make a full |
| 4. Withdrawals before age 59 1/2 are subject to the | | | | SEP IRA employee contribution if your MAGI is |
| 10% premature distribution penalty tax unless one of | | | | $50,000 (2006) or under and no contribution for |
| the exceptions apply. | | | | incomes of $60,000 (2006) or more. Again, for |
| 5. You have to start taking the money out (RMDs) at | | | | incomes between these numbers, a formula |
| age 70 1/2. | | | | determines a partial contribution limit. |
| The Benefits | | | | 5. If you are married and file a separate return, the |
| 1. SEP IRAs are simple. Essentially SEPS are big IRAs. | | | | phase-out starts at an income of zero. Adjusted gross |
| There is very little paperwork. | | | | income of $10,000 or more does not allow any |
| 2. They are flexible. You can vary the amount you | | | | contribution. |
| contribute each year from zero all the way up to the | | | | These benefits and rules of SEP IRAs are based on |
| year's maximum contribution limit. | | | | my understanding and cannot be used as tax advice. |
| 3. The total contribution limit is indexed which allows | | | | The proper plan will depend on your goals, income, tax |
| more to be contributed each year. | | | | filing status, and your participation in another qualified |
| 4. Employer contributions are generally not subject to | | | | plan. It would be best to sit down with your accountant |
| FICA (Social Security tax), FUTA (federal | | | | and financial planner and do the math on all your |
| unemployment tax) or income tax withholding. | | | | options. |
| 5. As an employee of your SEP IRA, you possibly can | | | | |