MONEY MATTERS: SEP IRA

Money Matters

Now, most of have heard about an individual IRA but there is an IRA out there called a SEP IRA which I must admit I never heard of. What is it and what is it designed to do?

A SEP IRA stands for Simplified Employee Pension and really what it is, it's designed for small business owners and what it allows you to do, let's say I have three employees, I set up an IRA for each of my three employees and I am able as an employer to contribute up to 25% of their pay into their account.

How do you decide who is eligible to be a part of this?

There's the catch, as an employer, if I do it for me, I have to do it for everyone that works for me. So as an employer, I am only able as the owner of the company or the employer. I can put up to only 20% for myself. Say you're self employed or a real estate agent, you can do 20% but for your employees you can do 25%. And they are vested 100% and if they work 3 of the last 5 years and they expected to make $600 they are eligible for it.

So how is the money invested compared to an IRA?

That's the beauty of it. It's their choice. They are 100% vested from day one. Every employee would setup an individual account for themselves in a mutual fund or a stock account and it's their discretion. They can invest it how they want to.

What about distributions? Are there limitations on distributions?

The distributions will work almost like a regular IRA. Meaning the money has to stay until you are 59 and a half. If you take it out before then there is a 10% penalty and it's all taxable once you start the distribution. But it grows tax deferred.

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