Simplified Employee Pension Plan (SEP)

By Entrepreneur Staff


Simplified Employee Pension Plan (SEP) Definition:

A retirement plan that allows you to contribute and deduct up to 20 percent of self-employment income (25 percent of salary if you're an employee of your own corporation)

As its name implies, the Simplified Employee Pension Plan (SEP) is the simplest type of retirement plan that is available. Essentially, this is a glorified IRA that allows you to contribute a set percentage up to a maximum amount each year. The percentage can be varied each year, so lower amounts (or nothing at all) can be contributed when you turn out to be starved for cash. The maximum dollar contribution is $42,000.

Paperwork is minimal, and you don't have to contribute every year. The catch is, employees don't make any contributions to SEPs. Employers must pay the full cost of the plan, and whatever percentage you contribute for yourself must be contributed to all eligible employees. The maximum contribution is 15 percent of an employee's salary or $24,000, whichever is less.

SEPs are great for procrastinators because they can be opened up as late as the extended due date of your income tax return. Finally, SEPs are much simpler to establish and administer than Keogh profit-sharing and pension plans. It literally takes only minutes to get one started--usually with no charge--with a bank, brokerage firm or insurance company. No annual government reports are required, and ongoing administrative expenses are nil. The bottom line is SEPs are just as easy as deductible IRAs, but they allow much bigger contributions.

See also "Retirement Plans."

More from Investing

Individual Retirement Account (IRA)

An interest-earning retirement savings account in which the allowable contributions and earnings aren't taxed until the funds are withdrawn, after age 59 1/2.

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Dollar-Cost Averaging

To invest, as in shares of stock, fixed amounts of money at regular intervals so as to buy more at lower prices ad less at higher prices

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Due Diligence

A reasonable investigation of a proposed investment deal and of the principals offering it before the transaction is finalized to check out an investment's worthiness; generally performed by the investor's attorney and accountant.

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Roth IRA

A personal retirement savings vehicle created by the Tax Payer Relief Act of 1997. A Roth IRA allows certain investors to make non-deductible contributions of up to $4,000 annually and, provided certain requirements are met, offers tax-free and penalty-free withdrawals for important financial needs in addition to retirement.

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