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Congress made it easy for the self-employed individual or small business owner to save for retirement with the Simplified Employee Pension (SEP) plan. The SEP allows an individual to put away up to $52,000 a year, tax deductible, into a retirement account.

With the SEP plan, the self-employed individual makes a contribution directly to an IRA account. Participants do not need a separate SEP account if they already have an established IRA, only a change on the name of the account is required.

Unlike the more common profit sharing or 401(k) plans, the SEP does not require complicated documentation, administration, or annual tax reporting relieving the employer of the expenses of a normal pension plan.

SEP’s are available for the self employed, including anyone with a part time business, sole proprietorships, S and C corporations, and partnerships.

An employer can contribute up to 25% of an employee’s annual compensation – not to exceed $52,000 and in the case of a self-employed individual, compensation is considered to be income as reported on Schedule C of a tax return. Direct Employer contributions to a SEP are not subject to Social Security (FICA) or Federal Unemployment (FUTA) taxes.

An employer-sponsored SEP plan cannot discriminate between employees. Contribution levels must be the same percentage of compensation for each employee.

Annual contributions by an employer are not mandatory and can be made when desired. All of the contributions go into the participant’s IRA and that person is immediately 100% vested in the contribution.

This allows the participant complete control over the investments just as they would have in a regular participant IRA. SEP participants may purchase any investment allowed in an IRA. Unlike qualified pension plans which limit in service withdrawals, the SEP allows the owner the right to withdraw the money immediately, subject to taxes and early withdrawal penalties. Participants may also convert the IRA into a Roth IRA, paying taxes for the amount converted.

Withdrawals form the SEP, are taxed just like an IRA, with participants paying ordinary income taxes plus a 10% penalty if distributions are taken before age 59 1/2. While loans are not permitted, the SEP account owner may make a qualified 60 day withdrawal and rollover once each year without incurring taxation or interest charges.

Employers wishing to set up a SEP for this year do not have to complete the paperwork or make the contribution until they file their 2014 taxes including any extensions.

Another important feature for employers contemplating establishment of a SEP is that employees do not have to be covered by the plan until they have worked three years.

Employees covered by collective bargaining agreements or non-resident aliens are also exempt from coverage. SEP’s are an ideal pension savings plan for the small business, because of the flexibility afforded to the employer in timing and amounts of contribution. The plan is also easy to use and understand, along with having low  administration expenses. One thing to remember, if your small business outgrows the SEP, you can always change to another kind of pension plan without penalties.