A Simplified Employee Pension funded into individual retirement accounts with a 25% of annual compensation limit for contributions with equivalent ratio allocations of contributions.
1. If your W-2 wage is at least $208,000 ($270,881 net profit if you are self-employed), you can fund and deduct as much as $52,000 annually on a discretionary basis for the 2014 Plan Year, as much as a profit sharing plan, without having to incur the cost of creating a 100 plus page document and having the obligation of preparing and filing an annual report (Form 5500).
2. If you are age 43 or younger and your W-2 wage is at least $208,000 ($270,881 net profit if you are self-employed), you can fund and deduct as much as you can with any other single qualified pension plan including a defined benefit pension plan.
3. If you adopt a SEP, you will not have the obligation of incurring the periodic cost of preparing any amendments whenever Congress passes new legislation related to qualified retirement plans.
4. Unlike any qualified employee retirement plan, you have the option to adopt a SEP after the end of your tax reporting year, up to the due date of your tax return, inclusive of the extension period.
5. When you reach the point when you no longer desire to fund new contributions into the plan, you avoid the trouble and expense of having to formally terminate the plan.
6. There is far less scrutiny of SEP plans than there is of qualified employee retirement plans by the IRS or any other government agency. Your individual tax return is subject to audit but not your SEP.
7. You are permitted to withdraw funds from a SEP-IRA account without any immediate requirement of making a tax withholding payment, as is the case with a withdrawal from a qualified retirement trust account.
1. If you have any employees who have earned as much as a $570 annual W-2 in the current and any two of the previous four years, you will have an obligation to contribute on his or her behalf, even if he or she is not employed for the majority of the year in which you choose to fund. And, depending on his or her age, you may have to contribute at a rate five times greater than if you sponsored a profit sharing plan instead of a SEP. Please note that under any qualified employee retirement plan, you can exclude any employee who works less than 1,000 hours annually from ever participating in a share of the contribution. This also potentially true of an employee who otherwise meets the eligibility requirements and is in a particular job classification or, for whatever reason, is not employed on the last day of the plan year.
2. Any monies held in a SEP-IRA account do not have the same creditor protection as those funds that are held in a qualified retirement trust because they are not governed under the Employee Retirement and Income Security Act (ERISA). Any IRA fund judgments are subject to the discretion of a judge or jury and require evidence and justification of economic necessity on the part of the titled owner of the IRA account. There is no such requirement under ERISA.
3. Unlike a qualified employees retirement plan, you are not allowed to act as your own trustee of a SEP-IRA account. Consequently, you will be restricted from making certain types of investments that are unacceptable to the IRA custodian. For example, if you want to purchase gold bullion with your SEP funds, you have to incur the cost of retaining an IRA custodian who is willing to approve such a transaction.
4. Unlike a profit sharing plan, you are precluded from making 401(k) salary deferral contributions in a SEP. Consequently, if you are age 50 or greater, and you earn in excess of $200,000 W-2 wages annually, you lose the opportunity of contributing an additional $5,500 annually (the so-called catch-up contribution). Moreover, if your W-2 wage, for any particular year, is below $200,000, but at least $132,000, you lose the opportunity to fund 25% of the difference in a SEP as opposed to a profit sharing plan.
5. If you are age 44 or greater, your opportunity to contribute more funds into a defined benefit pension plan is dramatically greater. Depending upon your exact age and circumstances, you may contribute deductible amounts multiple times greater than the allowable limits under a SEP.
6. If your intent is to maximize your contributions and deductions, you lose the opportunity to adopt multiple qualified retirement plans to achieve this goal. Moreover, you also lose the opportunity to significantly reduce the amount you are required to contribute to a SEP on behalf of an eligible employee by adopting a second, and or third, plan.
7. If you fund a SEP, you are precluded from contributing any money into a qualified employee retirement plan in the same plan year. Because SEP-IRA accounts are reported to the IRS by the custodian, it is easier for various government agencies to monitor and control the flow of these funds than those monies held in a qualified retirement trust where you act as your own trustee.
8. You are not permitted to borrow monies from a SEP-IRA account as you are with a qualified retirement plan. A participant in a qualified retirement plan can borrow up to $50,000 secured by his or her vested interest in the plan with a maturity date of up to five years (or greater if the loan is utilized to purchase a primary residence).
9. You are not permitted to hold certain assets such as life insurance titled in the name of the SEP-IRA even if you retain the services of a specialized IRA custodian.