A Salary Reduction Simplified Employee Pension IRA is a tax-deferred retirement plan provided by small businesses with fewer than 25 employees. Both the employees and the employer can make contributions to a SARSEP IRA. The contributions are made pre-tax through salary reduction and grow tax-deferred, along with any investment earnings until distribution, usually at the time of retirement.
SARSEP IRA is subject to the same rules that govern a Traditional IRA.
Is a SARSEP IRA right for you?
No new plans are permitted. An employer would have had to establish a plan prior to December 31, 1996 to be eligible to contribute. However, an employer that already offers the plan may add new employees.
Tax Features and Investments
What are the tax features?
Employees and employers may contribute pre-tax money to their IRAs through elective deferral contributions. Investments are tax-deferred until you withdraw the money from your account. Generally, withdrawals are taxable as ordinary income. Any withdrawals before age 59½ may be subject to an additional 10% penalty.
How much can I invest?
The annual limit is $22,500 in 2023 and $23,000 in 2024, while a catch up provision allows those who are age 50 and older to contribute an additional $7,500 in 2023 and 2024. Employers may make SEP contributions that cannot exceed the lesser of 25% of the employee’s compensation or $66,000 in 2023 and $69,000 in 2024. Lastly, the participant can also make an annual IRA contribution up to $6,500 in 2023 and $7,000 in 2024 and individuals ages 50 and older can make an additional catch-up contribution of $1,000. The IRA contribution may not be deductible.
What happens if I invest too much?
Investments made to an IRA or retirement account that are above allowable limits are called excess contributions. This can also happen if you were ineligible to contribute in the first place. In either scenario, excess contributions may be subject to additional taxes or penalties.
There may be several methods to remedying an excess contribution, but it’s always best to consult a certified tax advisor to find which solution works best for your situation. Contact us to learn about your excess contribution options with Janus Henderson.
What are the investment minimums?
There is no investment minimum to open the account or for salary reductions. Subsequent employee contributions must be at least $50 unless an automatic investment is established, which can be done for as little as $50 per occurrence.
Are there any investment deadlines?
You can make salary reduction contributions for the specific year in which your contribution was deducted from your paycheck. You can also make annual IRA contributions by your tax filing deadline, excluding any extensions, which is usually April 15 of the year following the tax year for which the contribution was made.
Employer contributions may be made through the tax filing deadline of the employer, which includes any extensions.
What are the fees for a SARSEP IRA?
There is no cost to open an account and no annual maintenance fees when account minimum thresholds are met.
Withdrawals and helpful information
How do I request an account withdrawal?
Depending on the account options you have selected, you may redeem shares by telephone, online or in writing.
Generally, withdrawals from a SARSEP IRA are taxable. There are no penalties on withdrawals after age 59½. Withdrawing prior to age 59½ may result in a 10% early withdrawal penalty and is taxed as current income.
If you need to withdraw assets prior to age 59½, check to see if any of these exceptions to the penalty apply.
Am I required to take money out of the account?
Yes, this is called a Required Minimum Distribution (RMD). If you turn age 73 before the end of 2023, you must take your first RMD by April 1st of the following year.
Failing to take your RMD could trigger a 25% (or 10% if corrected in a timely manner) excess accumulation penalty from the IRS on the amount of RMD not distributed.
However, if the employee is still working, employer contributions can continue until there’s no longer any compensation from work.
What other information might be helpful to know?
Remember that this account type can accept several types of annual contribution, such as salary reduction/elective deferrals, SEP and IRA contributions. Each type of contribution amount is limited based on the individual’s compensation and the ability to contribute to a retirement account. For additional information, read IRS Publication 560 or seek advice from a professional tax advisor.
The Janus Henderson Universal IRA Disclosure Statement and Custodial Agreement provides complete details about IRA accounts at Janus Henderson.
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Contact a Janus Henderson Representative
Our Janus Henderson Representatives will answer your questions and assist you through the movement of assets process. We are available at 800.525.3713 weekdays 9 a.m. to 6 p.m. EST.