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 Any investment earnings grow tax-deferred until withdrawn.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 $44,000 (for 2006 Tax year), whichever is less. 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.