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SEP IRA Rules: What You Need to Know

As a self-employed individual, you're likely familiar with the SEP IRA, a simple and inexpensive retirement plan available to small-business owners. But you may not know that the SEP IRA is the only business owner retirement plan that can be set up after year-end, potentially sheltering more money from Uncle Sam this tax season. You'll need to acquaint yourself with the SEP IRA rules before getting started.

SEP IRA primer
A SEP IRA is a type of business retirement plan available to business owners and their employees. SEP IRAs offers tax-deductible contributions, tax-deferred earnings, and a variety of investment options. Any type of business, including sole proprietorships, partnerships, or corporations, can set up SEP IRAs. SEPs can potentially save your business tens of thousands of dollars in taxes every year, making them very attractive.

Contribution rules
SEP IRA contribution limits are generous. The SEP IRA allows contributions up to 25% of compensation or $51,000 (whichever is less) for the 2013 tax-filing year. The maximum amount of compensation used in determining your contribution is $255,000 for the 2013 tax year. The employer's contribution rate must be the same for all eligible employees, including you as the owner. And contributions to SEP IRAs are always 100% vested, or owned, by the employee.

Eligibility rules
Business owners can exclude employees from the plan until they have worked for the business for three of the immediately preceding five years and are over the age of 21. Employers cannot exclude part-time employees from SEPs. Eligible employees can make traditional IRA contributions to their SEP IRA accounts, allowing them to exclude income from their own individual taxes.

Withdrawal and distribution rules 
SEP contributions and earnings can be withdrawn at any time. But a withdrawal is taxable in the year received. If a participant makes a withdrawal before age 59 1/2, a 10% early-withdrawal penalty generally also applies. SEP contributions and earnings must eventually be distributed. Beginning at age 70 1/2, required minimum distributions must be taken annually, as with traditional (but not Roth) IRAs. Loans from SEP IRAs are not permitted.

Funding deadlines 
You have until the April 15 tax-filing deadline to open and fund a SEP IRA for 2013. If you're filing an extension, then you have until Oct. 15 to set up a SEP.

If a SEP IRA makes sense for your business, then consider establishing and funding one before the tax-filing deadline. Check out more information about SEP IRAs directly from the IRS. Then be sure to explore brokerage firms that can help you set up a plan today.

Is Uncle Sam about to claim 40% of your hard-earned assets? 
Thanks to a 2013 law called the "American Taxpayer Relief Act (ATRA)," he can -- and WILL -- if you aren't properly prepared. Fortunately, The Motley Fool recently uncovered an arsenal of little-known loopholes to protect yourself from ATRA and help keep the taxman at bay when he inevitably comes calling. We reveal them all in a brand-new special report. Simply click the link below for instant, 100% FREE access.

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Nicole Seghetti
seghetti

Nicole is a contributing writer for The Motley Fool. She's worked as a financial advisor and planner for over a decade. Nicole holds an MBA from the University of the Pacific and a chemical engineering degree from Purdue University. She welcomes you to follow her on Twitter.

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