SARSEP IRA
Salary Reduction SEPs were replaced by
SIMPLE IRAs when Congress enacted the Small Business Job Protection Act of 1996; therefore, new SARSEPs can no longer be adopted. However, any employer that had a SARSEP in place prior to 1996 can maintain its SARSEP if the employer still has fewer than 25 employees. Also, each year at least 50% of the eligible employees must choose to make elective deferrals. If fewer than 50% participate, all elective deferrals made by any employee are “disallowed.”
Employee salary deferrals and employer contributions are deposited in an employee’s Traditional IRA.
SARSEP IRAs offer:
- Pre-tax Savings – SARSEP IRA account contributions are tax deductible for eligible employees.
- Tax-deferred Growth Potential – Taxes on SARSEP IRA investment earnings are deferred, meaning you need not pay taxes on anything that your SARSEP IRA earns until you retire or take a distribution.1 For many people, that time is years away, allowing for long-term investment growth. Withdrawals are taxed as ordinary income in the year distributed.
- Distributions – SARSEP IRA assets can be withdrawn without penalty after age 59½.1 Upon withdrawal, ordinary income taxes will apply. Distributions must begin no later than April 1 of the calendar year following the calendar year in which you attain age 70½, even if you are still working.
1Distributions from a traditional retirement account are subject to ordinary income taxes in the year distributed.
Distributions prior to age 59½ may incur an additional 10% penalty.