Annuities Vs. SEP

A SEP (Simplified Employee Pension) is a pension plan available for employers. Each employee has a SEP IRA and the employer makes all the contributions to the account. Even though an employer has a SEP in place, he doesn't have to contribute to the plan every year. An annuity is a retirement investment either used for employer-sponsored retirement plans, personal government qualified retirement plans such as an IRA or personal retirement savings.


There are limitations to the amount of money an employer contributes to the accounts. The maximum is 25 percent of salary or $46,000, whichever is smaller. The IRS only considers the first $230,000 of income to meet these requirements. There are no contribution limits for an annuity that isn't in an employer pension plan or IRA.


Businesses of all sizes, including sole proprietors, can have an SEP. One of the methods of funding a SEP is with an annuity. If you want to start a SEP, you must be an employer or self-employed. However, the same is not true for a non-pension plan annuity. Anyone can open one.

Tax Free

Your employer contributes to your SEP and you don't pay any taxes on that contribution. If you're a sole proprietor, you receive a tax deduction for the income you put into your SEP. You put after tax dollars into your personal annuity and only receive tax-deferred growth but don't receive a tax deduction.

Early Withdrawal

If you have a SEP and withdraw money before you're 59 1/2, you pay a 10 percent penalty on the entire amount since you never paid tax on the contribution. You also pay a penalty on any growth removed from an annuity. The government uses the LIFO (last in-first out) rule for annuities, which means the growth is always the first thing you remove. However, since you already paid taxes on the money you put in the annuity, you pay no penalty on the principal.

Excise Tax

If you're an employer and contributed too much to a SEP for yourself or any employee, you pay a 10 percent excise tax on the amount over the allowable contributions. No matter whether you're an employee or an employer, if your annuity wasn't a part of a qualified plan, a government-sponsored pension, there's no such thing as too much for a contribution, according to federal law.

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