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Greetings, Paula, and welcome to Fooldom.

<< I am not sure which one I am eligible. I work as a contract employee and I work at an average og 8 months in a firm? Am I considered self employed Or salaried?. In other words what is the eligibility for SEP-IRA?>>

I assume as a contract employee, you are responsible for your own FICA and income tax withholdings during the year, and that at the end of the year you receive a 1099 from your employer(s) as opposed to a W-2. There are many issues both the IRS and the DOL look at to determine if contract employees are self-employed or are, in fact, employees. I'm far from knowledgeable enough in that area to speak with authority. However, if you are indeed classified as one of the self-employed, then you may establish a SEP-IRA, a SIMPLE, or a Keogh. You should get a copy of IRS Pub 560 (Retirement Plans for the Self-Employed) to study the details, but here's a brief synopsis of each. Each is available to you even if you are the only employee.

Simplified Employee Pension (SEP). A SEP is a written retirement plan set up by self-employed persons, partnerships, sole proprietors, independent contractors, and owner-employees of an unincorporated trade or business. It is an easy method for a small employer to establish a retirement plan for employees without the complex administration and expense found in qualified retirement plans. In fact, a SEP may be established by an employer only if that employer has no qualified retirement plan in effect. Under a SEP, the employer may make a contribution of up to the lesser of 15% or $30,000 of compensation to IRAs established in each employee's name. Hence, such an arrangement is known as a SEP-IRA. When made, these contributions are owned in their entirety by the employee, and they may be withdrawn and/or transferred by the employee at any time. Contributions to a SEP by the employer are discretionary, but must be deposited into each eligible employee's IRA when made. Because these accounts are IRAs, the amounts therein are subject to all IRA rules regarding transfer, withdrawal and taxation. Prior to January 1, 1997, a SEP-IRA could have included a salary reduction arrangement in which an employee may elect to defer taxation on part of his or her compensation by contributing that amount to the SEP. This type of salary reduction plan is known as a SARSEP, and could have been established by an employer who had fewer than 25 employees provided at least 50 percent of all employees agreed to participate in the arrangement. Like a 401(k) plan, the employee's contribution to the SARSEP is limited to $9,500 per year. Effective January 1, 1997, no new SARSEP may be established; however, those in existence as of December 31, 1996, may continue to operate. The SARSEP has been replaced by the new SIMPLE arrangement discussed below.

Savings Incentive Match Plan for Employees (SIMPLE). Established by the Small Business Protection Act of 1996, the SIMPLE is a new type of retirement plan that may be set up by employers who have no other retirement plan and who have 100 or fewer employees with at least $5,000 in compensation for the previous year. SIMPLE plans are the replacement for the SARSEP plans discussed above. They may be structured as an IRA or as a 401(k) plan. Employees may defer any percentage of compensation up to $6,000 per year to the SIMPLE, and the employer is required to make a matching contribution of up to 3% of the employee's pay based on that election. The employer may reduce the maximum matching percentage in any two years out of five. Alternatively, the employer may establish a uniform 2% of salary contribution per year for all eligible employees regardless of whether they contribute to the SIMPLE or not. Together, the employee and the employer may contribute a maximum of $12,000 annually to the SIMPLE. Contributions are immediately vested with the employee, and deposits and earnings in the account will accumulate tax free until withdrawn. In general, distributions from a SIMPLE are taxed like those from an IRA. Withdrawals prior to age 59 1/2 are subject to the 10% early withdrawal excise tax in addition to ordinary income tax. Unlike an IRA or SEP, however, employees who withdraw money from a SIMPLE IRA within two years of their first participation in the plan will be assessed a 25% penalty tax on such withdrawals instead of 10%. This extra penalty does not apply to early withdrawals from a SIMPLE 401(k). Distributions from both types of SIMPLE may be transferred to another SIMPLE or to an IRA, but they are ineligible for transfer to a qualified retirement plan.

Keogh (HR-10) Plan. A Keogh plan is a qualified retirement plan established in law by the Self Employed Individuals Tax Retirement Act of 1962, otherwise known as the Keogh Act or HR-10. Keogh plans may be set up by self-employed persons, partnerships, and owners of unincorporated businesses as either a defined benefit or defined contribution plan. As defined contribution plans, they may be structured as a profit sharing, a money purchase, or a combined profit sharing/money purchase plan. Contributions are limited to the smaller of $30,000 or 25% of taxable compensation per year for employees, and to the smaller of $30,000 or 20% of taxable compensation for owner-employees. Keogh plans may not authorize loans. Contributions and all earnings accumulate free of tax until withdrawn, generally at retirement. In general, withdrawals prior to age 59 1/2 are subject to a 10% premature distribution penalty in addition to ordinary income tax; however, distributions are eligible for transfer to an IRA.

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