SEP-IRA
SEP-IRAs can
­provide a substantial
source of income
at ­retirement by
allowing employers
to set aside money
in ­retirement
accounts for
themselves and their
­eligible employees.
An Easy and Low-Cost ­Retirement
Plan For Your Small Business
SEP-IRAs (Simplified Employee Pensions) can ­provide a substantial source
of income at ­retirement by allowing employers to set aside money in
­retirement accounts for themselves and their ­eligible employees. Under a
SEP, an ­employer ­contributes directly to traditional ­individual ­retirement
accounts (SEP-IRAs) for all eligible ­employees (including owners). A SEP
does not have the start-up and operating costs of other ­qualified retirement
plans and allows for a ­contribution of up to 25% of each employee’s pay.
Small ­business owners and self-employed individuals, with or without
employees, may find the SEP-IRA not only to be an excellent way to save
for retirement, but an easy way to reduce current taxes.
Your Morgan Stanley
Smith Barney Financial
Advisor can discuss
the particulars of a
SEP retirement plan
with you and help you
determine if it is the
right plan for you and
your business.
SEP Tax Advantages
Contributions made to SEP accounts may be ­considered deductible business
expenses, reducing dollar-for-dollar the amount of income ­subject to taxes.
Contributions made to a SEP have the potential to grow tax-deferred. Plan
participants pay no taxes on the ­interest, dividends or capital gains earned by
SEP ­contributions until they begin to withdraw funds from the plan. Distributions made before age 59½ may be subject to a 10% premature withdrawal
­penalty. The tax-deferral feature of the SEP provides a ­powerful advantage
that taxable accounts just can’t match. In addition, it’s possible to consolidate
many different retirement plans—including Traditional IRAs—into a SEP.
Doing so may reduce fees and paperwork and will make tracking and allocating
investments easier.
Investment Choices in the Morgan Stanley Smith Barney SEP
A SEP allows you to offer a plan that is as simple as you want, with investment
choices that are as sophisticated as you need. An extensive menu of choices helps
ensure that both business owners and their employees can build well-balanced
portfolios suited to their individual risk tolerances and investment preferences.
If you or your employees are interested in mutual fund investments,* the
Morgan Stanley Smith Barney AutoVest** system will make it easy and
automatic for you to invest your contributions as they are deposited into your
account. You choose up to 15 mutual funds from a roster of hundreds of funds
offered by dozens of investment management companies.
* Investors should carefully consider the investment objectives and risks as well as
charges and expenses of a mutual fund before investing. To obtain a prospectus,
contact your Financial Advisor. The prospectus contains this and other information
about the mutual fund. Read the prospectus carefully before investing.
** Systematic or periodic investing does not assure a profit and does not protect against loss
in declining financial markets. An investor should be prepared to continue the program of
investing at regular intervals, even during economic downturns.
2 SEP-IRA
Let Morgan Stanley Smith Barney
Work With You
Your Morgan Stanley Smith Barney Financial Advisor
can discuss the particulars of a SEP retirement plan with
you and help you determine if it is the right plan for you
and your business. A good place to start your discussion
may be clarifying for yourself and your Financial Advisor
what your financial and retirement goals are right now.
A retirement planning analysis will help you visualize
the investment steps that can help make your dreams
a reality, and will give you ­concrete information that
you may apply as you establish your business’s SEP
retirement plan.
Advantages of a SEP
• Contributions to a SEP can be tax-deductible, and
your business pays no taxes on the earnings on the
investments.
• You are not locked into making contributions every
year. In fact, you decide each year whether or not,
and how much, to contribute to your employees’
SEP-IRAs.
• Sole proprietors, partnerships, and ­corporations,
including S corporations or limited liability ­companies
(LLCs), can set up SEPs.
• Your business may be eligible for a tax credit of up
to $500 per year for each of the first three years for
the cost of starting the plan and educating ­employees
about the plan.
• A SEP plan can be established and funded as late as
the date of your final tax-filing deadline, ­including
extensions.
• Contributions are made into the SEP-IRA of each
eligible employee, which reduces the fiduciary
­responsibility associated with managing plan
investments.
• Administrative costs are low. There is no charge to
adopt the SEP. Each Morgan Stanley Smith Barney
SEP-IRA account is charged $75 per year, which is not
a direct cost to the employer.
• You should not have to file any reports with any
­governmental agency.
Contributions to SEP-IRA Accounts
As the small business owner who established the SEP, your
obligation is to forward contributions to Morgan Stanley
Smith Barney for those employees who meet the eligibility
requirements to participate in the SEP as described in your
plan document. You do not have to make contributions
every year. Employee salary reduction contributions
cannot be made to a SEP. However, if a plan participant is
otherwise eligible they can make a deductible contribution
to an IRA.
At Morgan Stanley Smith Barney you can adopt a SEP
that ­determines contributions as either:
• A percentage of annual compensation
• A percentage of compensation that is adjusted to account
for the Social Security taxable wage base each year
SEP-IRA 3
Uniform Percentage Method
The simplest, and by far the most popular ­contribution
formula, is a uniform percentage of compensation
contributed across the board to all eligible employees. You
determine the ­percentage from year to year. With this
approach, your ­contribution for 2011 to each employee’s
SEP-IRA can be as much as 25% of compensation, up
to a maximum dollar amount of $49,000 whichever is
less. The maximum compensation that may be taken into
account for this calculation is $245,000 for 2011.
DISCRETIONARY CONTRIBUTION
FORMULA (10%)
There are special rules if you are a self-­employed
(unincorporated) individual. If you contribute to your
own SEP-IRA you must make a ­special ­computation
to determine your maximum ­contribution that takes
into account the deduction for one-half of your
self-employment tax, and the deduction for contributions
to your own SEP-IRA. You accomplish the second
adjustment by ­reducing the ­contribution rate called for
by the plan. A Rate Table for Self-Employed that converts
the plan contribution rate to the rate for the self-employed
individual is available from the Internal Revenue Service
(Publication 560).
Incorporated Business
Participant
Compensation
SEP
Contribution
A
$25,000
$2,500
B
50,000
5,000
C
100,000
10,000
D
200,000
20,000
Total
$37,500
For illustrative purposes only.
Unincorporated Business
Participant
Compensation
SEP
Contribution
A
$25,000
$2,500
B
50,000
5,000
C
100,000
10,000
Owner
200,000*
17,336
Total
$34,836
*Compensation is net earnings adjusted for one-half self-employment tax.
4 SEP-IRA
Integrated SEP
The other SEP contribution election available at
Morgan Stanley Smith Barney is an integrated contribution method. Under the integrated SEP, employer
contributions are allocated to the SEP-IRAs using a
­multiple-step formula that indirectly takes into account
the cap on payroll taxes paid and benefits that will be
received by highly compensated individuals from Social
Security. This contribution method is ­useful if you have
employees, because it allows you to control the total cost
of plan contributions while allocating a larger portion of
the total contribution amount to the owners and other
higher-paid employees of the business.
To understand the concept of integration, it is ­helpful to
think of Social Security as a ­retirement plan. Employers
pay a percentage of each e­ mployee’s pay into Social
Security. Payments ­continue until an employee reaches
the Social ­Security taxable wage base for the year. (The
­government may adjust the wage base annually—for
2011 the wage base is $106,800.) An integrated SEP
contribution formula recognizes that more highly paid
employees earning over $106,800 this year will not
receive any additional Social Security benefits on their
earnings over the wage base. ­Consequently, additional
contributions may be made to the SEP to compensate
for this disparity.
Example: Assume that an incorporated Employer elects
to make a discretionary Employer contribution equalling
$37,500 (10% of all Eligible Employees’ taxable compensation) for the plan year and to allocate the contributions
using the integrated method. Using the Social Security
taxable wage base of $106,800, the contributions would
be allocated as shown in the example below.
DISCRETIONARY INTEGRATED CONTRIBUTION FORMULA
Eligible
Employee
Compensation
Step 1
A
$25,000
750
+
0
+
675
+
721
=
2,146
B
$50,000
1,500
+
0
+
1,350
+
1,442
=
4,292
C
$100,000
3,000
+
0
+
2,700
+
2,883
=
8,583
D
$200,000
6,000
+
2,796
+
7,916
+
5,767
=
22,479
Total
$375,000
11,250
10,813
=
37,500
Step 2
2,796
Step 3
12,641
Step 4
Total
Note that the Social Security taxable wage base generally increases each year and any such increase will affect your allocation.
2011 Social Security Wage Base is $106,800. For illustrative purposes only.
SEP-IRA 5
Distributions
Participants cannot take loans from their SEP-IRA.
However, since contributions are 100% vested when
deposited participants can make withdrawals at any
time, subject to the limits discussed below. Withdrawals
can be rolled over tax-free to another SEP or traditional
IRA, or to another employer’s qualified retirement plan,
if allowed by the other plan.
Withdrawals from a SEP that are not rolled over to
another plan are subject to income tax for the year in
which the employee receives the distribution. If an
employee withdraws money from a SEP before age 59½,
a 10% premature distribution tax is due in addition to
regular income tax unless an exception applies. Several
specific exclusions, including disability or qualified
education expenses, would be exempt from the penalty.
6 SEP-IRA
As with other traditional IRAs, participants in a SEP
must begin withdrawing a specific minimum amount
from their accounts by April 1 of the year following
the year the participant reaches age 70½. Each year
following the year the participant reaches age 70½, an
additional Required Minimum Distribution must be
distributed by December 31. Morgan Stanley
Smith Barney will notify the participant by January 31
of each year what the Required Minimum Distribution
amount is for the current year. All participants must
receive these annual withdrawals, regardless of whether
or not they are working at age 70½. Failure to comply
will result in a 50% penalty of the amount that should
have been withdrawn, but wasn’t.
Establishing the SEP
Step 1: Your Morgan Stanley Smith Barney Financial Advisor will provide
you with a SEP-IRA custodial agreement.
A SEP may be established as late as the due date (including extensions)
of the company’s income tax return for the year you want to establish the
plan. For example, if your business’s fiscal year ends on December 31 and
you filed for an automatic six-month extension, the company’s tax return
for the year ending December 31, 2010 is September 15, 2011,
allowing you to establish and make the initial SEP contribution no later
than September 15, 2011.
Employee
An “employee” is not only
someone who works for
you, but also may be a selfemployed person as well
as an owner-employee who
has earned income. In other
words, you can contribute to a
SEP-IRA on your own behalf.
Eligible Employee
Step 2: Complete and sign the SEP custodial ­agreement. This agreement
becomes the plan’s basic legal document, describing the features of the
plan. Do not send it to the IRS; instead, use it as a reference since it sets
out the plan’s terms (e.g., eligible employees, includable compensation,
and employer contributions).
• Is at least 21 years old, and
Step 3: Give your employees a copy of the SEP agreement and disclosure
statement as well as an IRA Application for each eligible employee to
complete and sign. That will establish the account where employer
contributions will be deposited for that employee.
All eligible employees must
participate in the plan,
including part-time employees,
seasonal employees, and
employees who die or
terminate employment during
the year without regard to the
number of hours worked.
Step 4: Send copies of the SEP Agreement and all the employees’ IRA
Applications to your Morgan Stanley Smith ­Barney Financial Advisor.
• Has performed service for
you in at least three of the
last five years.
Your business has the option
of excluding the following
categories of employees:
• Employees covered by a
union contract
• Nonresident alien employees
who did not earn U.S.
source income from you
• Employees who received
less than $500 in
compensation during the
year (subject to cost-ofliving-adjustments)
SEP-IRA 7
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates, and Morgan Stanley Smith Barney Financial Advisors do not provide
tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except
as otherwise agreed to in writing by Morgan Stanley Smith Barney. This material was not intended or written to be used for the purpose of avoiding tax penalties
that may be imposed on the taxpayer. Individuals are urged to consult their tax or legal advisors before engaging in any transaction involving SEP IRAs, SIMPLE
IRAs, SAR-SEP IRAs or other tax-advantaged investment vehicles.
© 2011 Morgan Stanley Smith Barney LLC. Member SIPC.
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