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Understanding a SEP-IRA
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July 5, 2000: 2:00 p.m. ET
SEP-IRAs offer a flexible, inexpensive way to contribute to staff retirement
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NEW YORK (CNNfn) - While planning for your retirement, you've learned a lot about traditional IRAs and Roth IRAs, but what about a SEP-IRA? How does it work and what is the process for establishing one?
In response to a reader's question, Marc Collier, a certified financial planner from Wellesley, Mass., and a member of the Financial Planning Association outlined the steps involved in setting up a plan.
What would it take to set-up a SEP-IRA, as far as legal work that would be required and the actual selection of investment within the IRA? Can you tell me more?
A SEP-IRA is basically an IRA set up as a 'Simplified Employee Plan' (SEP) by an employer.
It is very simple to set up a SEP, generally requiring an application very similar to an IRA application. The SEP can be set up through a bank, insurance company or other qualified financial institution such as a mutual fund company or a brokerage company.
A SEP provides an employer a simplified way to make contributions to an employee's individual retirement account and requires no formal administration. If you are self-employed, you need only include yourself in the plan.
The annual contribution may be made each year, but it is not required. If a contribution is made for one employee, it must be made for all. An IRS form 5305-SEP serves as the plan document.
The percentage of income allowed is 15 percent or $30,000, whichever is less. Employees age 21 or older and with a minimum of $450 per year must generally be included. If a person is self-employed, the amounts are 13.0435 percent or $30,000 of compensation.
Contributions may be made until the tax due date plus extensions. The account is always 100 percent vested and withdrawals are subject to the same rules as IRAs (age 59 1/2 minimum or a 10 percent penalty is applied).
Investments may be most or all equity or debt instruments (stocks, bonds, mutual funds, annuities, etc.) but not life insurance or 'collectibles.' Participants generally direct their own investments.
SEPs are simple, inexpensive, and very flexible. 
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