SEP-IRA for Small Business

SEP stands for Simplified Employee Pension. This is a special type of IRA plan that allows an employer to make contributions toward his or her own (if self-employed) or employees' retirement. The SEP essentially functions as a low-cost pension plan for small businesses.

The SEP-IRA enrollment process is also very simple. It's a 2-page application process. The employer needs to complete Form 5305-SEP. The employee completes the IRA investment application usually supplied by a mutual fund company or some other financial institution which will hold and manage the funds. The best part is: nothing needs to be filed with the IRS to establish the SEP-IRA or subsequently. Unlike many other retirement plans SEP does not require IRS annual returns. Any investment earnings grow tax-deferred until withdrawn.

Some other facts about SEP-IRA: Employers can contribute a maximum of 25% of an employee's eligible compensation or $52,000 (for 2014 Tax year), whichever is less. These limits are subject to future cost-of-living adjustments as the years go by. Also in 2014, only the first 260,000 dollars of an employee’s compensation could be considered when making this calculation.

Employees are able to exclude from current income the entire SEP contribution. The money contributed to a SEP-IRA belongs to the employee immediately and always. If the employee leaves the company, all contributions also leave with the employee.