Simplified Employee Pension Plans (SEPs)
Your employer may sponsor a simplified employee pension plan or SEP IRA. Commonly referred to as SEPs, this is a relatively uncomplicated retirement savings vehicle. A SEP allows employees to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. When terminated (i.e. if the business is closed) you may be permitted to roll the remaining fund balance into a regular IRA. Maximum contributions to a SEP in 2020 are 25% of participant’s compensation up to $58,000, or 20% of your adjusted yearly income (a limit of $285,000). Contributions to a SEP can be made even if a participant is over 70-1/2 years old. Excess contributions made during the year may be carried over to the following year without incurring penalties either (unlike other retirement plans). The due date for making contributions is the filing date including extensions.
However, contributions to a solo 401K for example, could provide for a $58,000 contribution up to a maximum of 100% of compensation.
SEPs are subject to minimal reporting requirements. Taxpayers filing form 1040 schedule C are those who would typically use this type of retirement plan. Also, corporations may use this type of plan, by meeting certain filing requirements, providing deadline and recordkeeping advantages.