From the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®


(November 1, 2006) -- If you’re self-employed and looking for a simple and efficient way to save for retirement, consider a Simplified Employee Pension (SEP) plan, suggests the Virginia Society of CPAs. SEPs are a great way to save for retirement, especially if you don’t have employees working for you.

Here’s why: If you set up and contribute to a SEP, the same percentage of compensation must be contributed for each eligible employee. If there are no employees, you’re free to establish a high-contribution percentage. For 2006, that could mean setting aside up to $44,000, depending on your self-employment income. By comparison, without a SEP, the most you could contribute to a traditional Individual Retirement Account (IRA) would be $4,000 ($5,000 if age 50 or older).

Who qualifies?

Anyone with self-employment income can establish a SEP, even if already covered by a retirement plan at a full-time job. This includes sole proprietors, partners in a partnership for which a plan is established and small business owners.

Tax benefits

Contributions to SEPs are tax-deductible and grow tax-deferred. Under the rules applying to 2006, the maximum contribution to a SEP is $44,000.

In addition to the tax deduction for your contribution, which reduces your tax bill, you benefit from the tax-deferred status of the investment earnings within your SEP. Those earnings continue to grow tax-deferred until withdrawn, generally at retirement, when your distributions are taxed as ordinary income.

SEPs are flexible

A SEP does not require mandatory annual contributions, so in a year when business has been slow, you can contribute a lower percentage or none at all. And unlike traditional IRAs, you can continue to contribute to a SEP after you reach age 70½, as long as you still have earned income.

Another advantage of SEPs is the timing. You can establish and contribute to a SEP as late as the filing date, with extensions, for your tax return.

With employees come added requirements

If you hire employees, in any given year in which you make a contribution to your own SEP, you are required to contribute the same percentage to SEPs for all eligible employees. Eligible employees are those who (1) are at least 21 years old; (2) have worked for you for at least three of the previous five years; and (3) have earned at least $450 from your business in 2006.

Unlike many other retirement plans, SEP participants are immediately 100 percent vested and have full ownership rights to the funds you contribute on their behalf.

SEP distributions follow traditional IRA rules

For the purpose of distributions, SEPs follow the same rules as IRAs. You must begin taking distributions from your SEP when you reach age 70½. Withdrawing from a SEP before you reach age 59½ generally results in a 10 percent penalty, in addition to paying income tax on the withdrawn amount.

A CPA can help

A CPA can help you determine if a SEP is right for your business. Make an appointment today and begin preparing for a more secure future.


The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at


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