Law Firm's Guide To Sep Ira Setup

A Simplified Employee Pension (SEP) IRA is a retirement plan that allows employers to contribute to traditional IRAs set up for their employees. Any business owner, including self-employed individuals or freelancers, can establish a SEP IRA. This means that a law firm, as a business, can set up a SEP IRA. However, it is important to note that only employers can contribute to a SEP IRA and they must contribute the same percentage of salary for any eligible employees as they do for themselves.

What is a SEP IRA?

A Simplified Employee Pension (SEP) IRA is a retirement plan that allows employers to contribute to traditional IRAs set up for their employees. It is a simplified method for business owners to contribute to their employees' retirement savings as well as their own. A SEP-IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs.

Any employer, including self-employed individuals, can establish a SEP. This includes limited liability companies (LLCs) set up as unincorporated businesses, such as sole proprietorships, partnerships, and limited liability partnerships (LLPs). A business of any size can establish a SEP, and they can be set up with banks, insurance companies, or other qualified financial institutions.

There are three basic steps to setting up a SEP: first, a formal written agreement must be adopted by signing one of the following documents: an IRS model SEP using Form 5305-SEP, a Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement; an IRS-approved prototype SEP offered by banks, insurance companies, and other qualified financial institutions; or an individually designed SEP plan document. Second, each eligible employee must be provided with information about the SEP, including a copy of the form and its instructions, and a statement that the IRAs other than the one the employer contributes to may provide different rates of return and contain different terms. Third, a SEP-IRA must be set up by or for each eligible employee.

The IRS requires contributions to a SEP-IRA to be reported on Form 5498 for the year they are deposited, regardless of the year for which they are made. The maximum contribution is 25% of compensation, and the total contributions to each employee's SEP-IRA are limited. As of 2024, contributions cannot exceed $69,000 per year. The definition of compensation differs depending on the business structure, and contributions must be the same percentage of each participant's compensation.

Who can set up a SEP IRA?

A Simplified Employee Pension (SEP) IRA is a retirement plan that can be set up by any business owner, including self-employed individuals, freelancers, and those with unincorporated businesses. This includes sole proprietors, partnerships, limited liability companies (LLCs), and corporations (including S corporations).

To be eligible to set up a SEP IRA, a business owner must have at least one employee, including themselves if they receive compensation from the business. Eligible employees must have worked for the business owner in at least three of the last five years, be over the age of 21, and have earned at least $750 in compensation in 2024 (this amount varies for previous years).

It is important to note that only employers can contribute to a SEP IRA, and they must contribute the same percentage of salary for all eligible employees, including themselves. The maximum contribution for 2024 is $69,000 per person per year, and contributions are tax-deductible.

SEP IRAs are attractive to small business owners and the self-employed because they are easy to set up and administer, with lower administrative costs and flexible annual contributions. They can be established by filling out a form online or in person at a financial institution, such as a bank, insurance company, or credit union.

How to set up a SEP IRA

A Simplified Employee Pension (SEP) IRA is a retirement plan that allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A SEP-IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs.

• Choose a financial institution: Select a bank, insurance company, or other qualified financial institution to serve as the trustee of the SEP-IRAs. The institution will hold each employee's retirement plan assets and receive the contributions you make to the plan.
• Execute a written agreement: Create a formal written agreement using an IRS-approved prototype SEP or an individually designed SEP plan document. You can adopt an IRS model SEP using Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement. This form outlines the rules for your plan and includes important information such as eligibility requirements and contribution limits.
• Provide information to employees: Give employees certain information about the agreement, including details on their participation, investment decisions, and any applicable fees or commissions.
• Set up individual SEP-IRAs: Establish a SEP-IRA account for each eligible employee, including yourself if you are self-employed. These accounts can be set up online or in person at your chosen financial institution.
• Make contributions: Determine the contribution method that best suits your business structure. Contributions can be made through direct deposit from your bank account, electronic funds transfer, online transfers, mobile check deposit, or by phone, depending on the financial institution and your business setup.
• Maintain and review your plan: SEP-IRAs require minimal maintenance, but it is important to ensure your plan remains up-to-date with current laws and regulations. Conduct periodic reviews to ensure your SEP plan continues to operate within the rules and retains its tax benefits.

Remember, the specific steps and requirements may vary depending on your business structure and location. It is always recommended to consult with a tax advisor or financial professional before establishing or making changes to your retirement plan.

Contribution limits and rules

A Simplified Employee Pension (SEP) plan allows business owners to contribute to their employees' retirement savings as well as their own. Contributions are made to a traditional Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA).

SEP contributions are capped at $61,000 for 2022 and $66,000 for 2023. These limits apply to total contributions to this or any other defined contribution plans. The maximum deductible contribution is 25% of each employee's pay. Contributions to a SEP are tax-deductible, and your business pays no taxes on investment earnings.

Contributions for all participants must be uniform, i.e., the same percentage of compensation. Employee salary reduction contributions are not permitted. The SEP-IRA account owner must be the employee, and they own and control the account.

There are special rules for self-employed individuals. If you are self-employed, you can base your contribution on net profit minus one-half of the self-employment tax and minus your SEP contribution.

You are not required to contribute every year. When you do contribute, you must contribute to the SEP-IRAs of all participants who performed work for your business during the year, including those who die or terminate employment before the contributions are made.

You can set up a SEP plan for a year as late as the due date (including extensions) of your business's income tax return for that year. You can also maintain another plan alongside a SEP, but you must adopt a prototype or individually designed SEP, not another SEP.

SEP IRA benefits

A Simplified Employee Pension (SEP) plan is a tax-advantaged retirement plan that allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A SEP plan is easy to set up and has lower operating costs than a conventional retirement plan. It is ideal for self-employed individuals, small businesses with no employees, and businesses with many employees.

Benefits of SEP IRA

A Simplified Employee Pension (SEP) plan has several benefits for both employers and employees:

• Tax advantages: Contributions to a SEP-IRA are tax-deductible, and the business pays no taxes on investment earnings. This means that employers can deduct the contributions they make to the plan from their taxable income. Additionally, contributions and earnings grow tax-deferred in the SEP-IRA, meaning they are not taxed until they are withdrawn during retirement.
• Flexibility: A SEP plan offers flexibility in contributions. Employers can decide each year whether and how much to contribute to their employees' SEP-IRAs, with the ability to contribute up to 25% of each eligible employee's income (up to a maximum of $70,000 per person for 2025). Employers can also skip years and are not locked into making contributions every year.
• Low administrative costs: SEP plans have no start-up or ongoing administrative costs, making them a cost-effective option for businesses of any size.
• Eligibility: All eligible employees must participate in the plan, including part-time and seasonal employees. This ensures that a wide range of employees can benefit from the plan.
• Rollover options: Funds in a SEP-IRA can be rolled over into most IRAs and qualified plans, such as a traditional IRA or a 401(k). This provides flexibility for employees in managing their retirement savings.
• No filing requirements: Generally, employers do not have to file any documents with the government for a SEP plan, and there are no special tax filings required.
• Correction programs: The U.S. Department of Labor and the IRS offer correction programs to help employers correct plan errors, protect participants' interests, and maintain the plan's tax benefits.
• No minimum balance: Some financial institutions, like Fidelity, offer SEP-IRA accounts with no minimum balance requirements, making it accessible for individuals to start saving for retirement.
• Contribution eligibility: Business owners and self-employed individuals can contribute to their own retirement savings through a SEP-IRA, in addition to contributing to their employees' plans.
• Credit for start-up costs: Employers may be eligible for a tax credit of up to $500 per year for the first three years to offset the cost of establishing the plan.

Overall, a SEP-IRA provides a simplified and cost-effective way for employers to contribute to their employees' retirement savings, while also offering tax advantages and flexibility in contributions.

Frequently asked questions