All eligible employees must open an IRA to receive the employer's contribution to the SEP. If the employee does not open an IRA account, the employer must open one for them. The employee must be at least 21 years old, and have worked during three of the last five years for the employer, and have earned at least $550. All eligible employees must participate as well as the employer.


The employer may contribute between 0 and 25 percent of the employee's total compensation to a maximum of $52,000. Contributions to all SEP IRAs, including the employer's SEP IRA, must be made at the same rate. An employee who is over 70 1/2 must also participate and receive a contribution. All eligible employees are immediately vested in the employer's contributions to the plan.


Employer's contributions to a SEP IRA are immediately tax-deductible by the employer. Contributions are not taxed at the employee's rate until the employee withdraws the funds. Employees may begin to withdraw money from the plan at age 59 1/2. All withdrawals are taxed as ordinary income and withdrawals prior to age 59 1/2 are subject to a 10 percent penalty tax. The employer may contribute up to 25 percent of the employee's income, up to $52,000.


An educational IRA allows individuals to contribute up to $2,000 in after-tax dollars to an educational IRA for each student who is under 18 years of age. The money is allowed to grow tax-deferred and the growth may be withdrawn tax-free as long as the money is used for educational purposes. If all of the funds have not been used for educational purposes by the time the student reaches 30 years of age, the account must be rolled over to another family member who is under 30 years of age or distributed to the original student and subject to a 10 percent penalty tax as well as ordinary income taxes.

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