How About Getting A SAR SEP?SARSEP stands for Salary Reduction Simplified Employee Pension Plan. In SAR SEP IRA, both, the employer and the employee make the contribution. It is a tax deferred arrangement wherein the tax is deducted just like normal income at the time of withdrawal. As far as the rules are concerned, they are the same for SARSEP as those for a regular IRA. However, like with the other plans, SARSEP also has contribution limits of the employee as well as the employer. An employee can not contribute more than $10,500 annually to his SARSEP account. If the employer also makes contributions then the total amount can not exceed $30,000 annually. Who all can participate in SARSEP? All the employees working for the company must be included in a SARSEP. However, those who have not worked for the company for 3 out of the last 5 years can not be included. Also, those who have not reached the age of 21 years can not be included in SARSEP. Also, those who are not the residents of US and have received less than $500 in compensation can not be included in SARSEP. Withdrawal or distribution rules for SARSEP SARSEP contributions and earnings can be withdrawn at any time. Whenever, you would make the withdrawal, you will have to pay the taxes on the withdrawal amount. However, you could roll over your earnings to other accounts without any additional costs. How Does SARSEP work? To understand the working or SARSEP, let's take an example. Suppose X works in the company Y who plans to take up SARSEP. Y then chooses a financial institution that has various investment funds. Y knows that there could be up and down times for the business and therefore the company would make variable contributions accordingly. Now as the SARSEP begins, X decides to invest his money in two of the funds offered by the financial institution. This is how SARSEP works. Some pros and cons of SARSEP SARSEP is easy to establish and operate and has low administrative costs as well. Moreover, the plan does not ask you to make fixed contributions every time. You could contribute as per a particular year's income. Also, there are rules to check that the highly compensated employees do not take away all the benefits. So, SARSEP is another variation in the normal SEP plan that is very beneficial. It is advisable that the organization intimates all its employees about the maintenance of SAR SEP. They must also be told about the requirements that they would have to meet to get the employer's contribution and the basis of getting the same. |