In an effort to reduce my debt load, I have taken an additional job in order to increase my accelerator margin payments. The good news is, in the 4 months I’ve been doing this new routine we’ve paid off four credit cards as well as a vehicle loan. The great news is that this new job offers a SEP account. Well, what exactly is a SEP account, is it just a different term for a 401k? Let’s take a look and find out.

Employers will typically offer one of these plans: 401(k), 403 (b), TSA, SIMPLE, SEP, or Keogh.

401(k) is the most popular type of employer sponsored retirement plan. This is also the most complex and costly to maintain for the company. The employer can elect to make a matching contribution to the employees salary-deferral contribution . Within 401(k)’s you can take out loans, set up a vesting schedule, and profit-sharing plan. Maximum annual contributions are $15,500.

What all this means is that you can invest dollars that have never been taxed, thereby lowering the amount of your paycheck that is taxed. Depending on the plan with your company, for every dollar you invest your employer might throw in 50 cents up to a maximum amount, usually 3%. So if you contribute 3% of your salary, your employer will give you another 1.5% on top of it for ‘free’.

With a vesting schedule, your employer is basically insuring their investment in you. Once you are employed with the company for a certain amount of years, all of the company’s portion becomes 100% yours. However, if you leave the company early, after a year or two, you have to return a percentage of the company’s contribution.

While the funds are invested and growing, you do not owe any taxes. This is a tax-deferred arrangement where you will owe taxes when you pull the money out, taxed at a rate dictated by your current tax bracket. Keep in mind there are penalties for early withdrawal. On top of owing taxes due on that amount, you’re also required to pay a 10% penalty! Loaning yourself money out of this account is also an option, however you have to stick to a repayment plan and have the money back within 5 years. The loan amount can be any amount between $1,000-$50,000 and might carry a nominal fee.

403(b)‘s are essentially the same as 401(k)’s except that these are offered to government employees, not-for-profit organizations and ministers. Tax-Sheltered Annuities (TSA) are a type of 403(b) where funds can be invested in annuities through insurance companies or in mutual funds as a custodial account.

Thrift Savings Plan (TSP) is an equivalent plan that the military offers.

Simplified Employee Pension Plan (SEP) is most often utilized by self-employed persons. If the business owner has employees he must offer this benefit to them as well. A SEP operates similarly to an IRA where funds can be invested just as they would within an IRA shelter at the control and discretion of the owner (employee). The funds are taxed at ordinary income tax rates, withdrawals can be made at 59 1/2 years of age, and contributions are deductible. For employees to qualify, they must have worked 3 of the previous 5 years with the employer, be 21 years of age, and earned at least $500 of compensation for the tax year. Max annual contributions are the lesser of 25% of employees compensation or $46,000 (for 2008).

Saving Incentive Match Plan for Employees (SIMPLE) is also set up by self-employed persons. Employees of the business owner are eligible if he has 100 or fewer employees who received $5,000 or more in contributions in the previous two calender years. Maximum annual contributions are $10,500 (for 2008). The employer has two choices in funding the employees account: matching 1-3% of employees contributions with pre-tax dollars or a flat 2% non-elective contribution regardless of whether the employee makes any contributions himself.

Keogh plan is named after the Senator who created it. Keogh’s tend to be more complicated than SEP’s but allow you to set aside more money for retirement. Same as a SIMPLE, if you fund a Keogh as self-employed or an unincorporated business you will also need to do this for your eligible employees. Keogh’s offer two types of plans money purchase or profit-sharing. For money purchase plans, used by high-income earners, you can put away the lesser of 25% or $46,000 (for 2008). With profit-sharing plans, you can contribute the lesser of 3-25% or $46,000 (for 2008). This plan offers annual flexibility based on profits.

Many benefits can be gained in pursuing an employer sponsored retirement plan. You will be able to put away more towards your retirement than you could with an individual account of just $5,000 a year for IRA’s. You will also reduce your taxable income by contributing to a 401 (k) or SIMPLE with pre-tax dollars. Keep in mind you will still owe taxes but these with be taken out at the time of withdrawal.

If your company offers any of these you should immediately take advantage of the offer. No matter how large your debt or small your income you should ALWAYS accept and participate in the highest company matching program. You’ll never be able to afford to turn down free money!

Game Plan Scenarios:

1-Your Company Offers a Retirement Plan with a Match

Invest fully in this account up to the point of the full match AND then fully fund a Roth IRA.

2-Your Company Offers a Retirement Plan but no Match

First priority is fully funding a Roth IRA and then the employer sponsored account.

3- You don’t have the money to invest in both accounts

Invest in the 401(k) only if your company matches, if not, fund a Roth IRA.

Remember 401 (k)’s, 403 (b)’s, TSA’s, and TSP’s are not tax-free. You just pay the taxes at the end instead of at the beginning. However, be aware, the taxes are based on your tax bracket, more than likely the younger you are the lower the tax bracket you’ll find yourself in. Also, taxes will rise. In some instances, there are more tax advantages to taking the tax hit now, while you’re in a lower bracket and before taxes inevitably increase.

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