SARSEP

SARSEP is a special type of Individual Retirement Account which provides good benefits to the employees, retirees and the older adults. It is also referred to as the Salary Reduction Simplified Employee Pension Plan and provides a wonderful alternative to the 401(k) plan.

The plan is applicable for organizations and companies which consist of 25 or lesser employees. The employers as well as the employees can make contributions into the SARSEP IRA plan.

The contributions that you make are done on a pre tax basis in the form of salary reduction. Under the tax laws, the employers are not allowed to establish a new SARSEP plan. However, one can include new employees into the plan. The rules and regulations of the plan are more or less similar to the traditional IRA plan. By contributing to the account, the employees can reduce the new income of the current year.

Tax benefits

By being covered under the SARSEP plan, both the employers and employees can get some tax benefits. Some of the benefits are:

• The employees are allowed to make the pre-tax contributions to their account in the form of salary reductions every year.
• The investments that you make are tax deferred until the money is withdrawn from the account. After you withdraw the money from the account, taxes are applicable.
• The cost of administration of the accounts is also low compared to other retirement plans.

Contribution features

In order to be covered under the SARSEP plan, the contribution of the employer should not be more than the 25% of the employee compensation. It can also be $49,000 for the year 2009.

The employee contributions should be more or less same as the salary reduction agreements. It should not be more than $16,500 for the year 2009.

If the employee is 50 0r more years of age, he or she may be entitled to catch-up contributions. For the year 2009, the maximum amount of the catch-up contribution is $5,500.

Another good feature of the SARSEP plan is that it can be also used to make the annual IRA contributions. The upper limit of the IRA contributions for the year 2009 is $5,000.

Terms and conditions

In case of the SARSEP plans, there are some conditions that you need to follow. They are:

• The contributions of the employer can be done on the basis of the employer’s tax filing deadline which may also consist of extensions.
• The salary reduction contributions need to be made for the particular year from which the issue of the paycheck was done.