The Retirement Plan Dilemma
Either go broke trying to comply with the federal rigmarole of a formal pension plan...or get taxed supplementing the $4,000 maximum annual contribution to an IRA. ¹ There is a third choice. It's called a SEP — for Simplified Employee Pension — and it was designed with the small business owner in mind. Best of all, it's easy to set up and requires only a minimum amount of administration.

It's no secret that a qualified pension plan can be a costly administrative nightmare. It can require hours of bookkeeping, followed by frustrating attempts to meet the federal government's torturous compliance and record keeping requirements. That's why many small business owners end up with either a pension plan designed for General Motors or opt to skip the whole thing.

The Simplified Employee Pension is an attractive alternative. SEPs are hybrid plans that combine the high contribution limits of a formal pension plan with the simplicity of an IRA. As an employer-sponsored retirement plan, a SEP can be established by a sole proprietor, partnership or corporation.

The best part about a SEP: You can save taxes today while building a retirement fund for tomorrow...all with a minimum of administrative cost and paperwork.

Here are the basics of how a Simplified Employee Pension works :²

• For the 2006 tax year employees can contribute up to the lesser of 25% (20% for self-employed individuals after certain deductions) of includable compensation (which is limited to the first $220,000) or $44,000. For 2007, the contribution limits increase to $45,000 and includable compensation increases to $225,000.
• You have until the tax-filing deadline, including extensions, to make your contributions.
• It can serve as a freestanding pension plan or as a supplement to a qualified corporate pension plan, provided contribution limitations and other restrictions are met. In this respect, a SEP provides a great deal of flexibility for the business owner.
• There are a number of funding vehicles available. Essentially, the options are identical to those allowed for IRAs. In fact, the employer (and this includes contributions made by self-employeds, sole proprietors and partners on their own behalf) simply makes contributions to an IRA established by the employee. In fact, if the participant already has an IRA, it is not necessary to establish a new account. Funding vehicles include annuities, mutual funds, and certificates of deposit.
• In most cases, there are no installation costs. The requirements for establishing and filing a SEP are minimal. You must prepare a plan document and give notice of the plan to any eligible employees. Most employers can use IRS form 5305 to establish a model SEP, which can easily be adapted to your needs.
• Ongoing administration costs and reporting requirements are minimal. For example, no annual reports need be filed with the IRS. Nor must employees be furnished with annual reports, plan summaries or other documents. This simplified reporting and disclosure process makes SEPs especially attractive to small business owners.
• All investment decisions are the responsibility of the employee or participant. The employer bears no fiduciary responsibilities.
• All funds (including employer contributions) are immediately vested and may be withdrawn by the employee at any time or rolled over to another plan. This reduces the "golden handcuffs" value of a SEP to retain employees to retirement. However, if the employee is under 59 1/2, withdrawals may be subject to a 10 percent excise penalty.
• Unlike with conventional qualified plans, no loans are permitted. A loan results in immediate disqualification of the entire account.

How funds accumulate in a SEP: Here is how $10,000 in annual contributions will look, principal and interest, rounded to the nearest hundred dollars, based on several average rates of return.

Caution: If you have employees, they must be included. Also, withdrawals are subject to the same limits, restrictions and penalties as IRAs — a possible 10 percent penalty, plus current income taxes.

Is a Simplified Employee Pension right for your business? Perhaps. It's certainly worthwhile to find out more.

Let your New York Life Insurance Company agent help. For more details, contact your New York Life agent. He or she will be glad to review your needs, explain the ins and outs of what a SEP and help you decide if a SEP is the best-choice option for you and your company.

¹This is for income tax years 2005–2007. Under current tax law, if you are over age 50, you can make additional contributions of $500 for 2005, $1,000 for 2006 and 2007.

²"FAQs Regarding SEPS," Internal Revenue Service, United States Department of Treasury (www.irs.gov)

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