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What is a SARSEP?
A Salary Reduction Simplified Employee Pension Plan (or SARSEP as it was referred to as) is a retirement vehicle that was available to small businesses with only 25 employees or less. After January 1, 1997, SARSEPs were superseded by SIMPLE IRAs, as a component of the Small Business Job Protection Act of 1996. However, a SARSEP established prior to 1997 can still be used. As per the Internal Revenue Service guidelines pertaining to these retirement accounts, “employers who established SARSEPs prior to January 1, 1997, can continue to maintain them and new employees of the employers hired after December 31, 1996, can participate in the existing SARSEPs”, as long as they have been employed by the company for three of the last five years.
With a SARSEP, it is mandatory that all contributions be kept in an individual SEP-IRA established for each participating employee. Contributions for this type of retirement account are both employee salary reduction contributions and nonelective employer contributions.
For 2022, the salary reduction contributions of SARSEP participants cannot exceed $20,500, or be more than 25% of a total annual income. Total contributions of both employee and employer are the same as a SEP IRA, $61,000 for 2022. The IRS permits catch-up contributions with this type of retirement vehicle.
A SARSEP has the same distribution limitations as other types of retirement accounts. SARSEPS have a 10% early-withdrawal penalty on the funds if you make distributions prior to 59 ½, with the IRS making some exceptions in extenuating circumstances.
SARSEP Rollover Rules & Limitations
The IRS has stringent regulations when it comes to rollovers for a SARSEP or any other retirement vehicle. Funds from an individual employee SEP-IRA within the SARSEP can be “rolled over” or transferred into another type of retirement account within a period of 60 days, as per IRS rules. Additionally, funds can only be rolled over once in a 365-day period from a specific IRA into another IRA. If you already own a SEP IRA, you can easily put that money into a self-directed IRA, like a Precious Metals IRA.
Essentially there are two ways to move money from your SEP IRA within the SARSEP into another retirement account: either a rollover, or a custodian-to-custodian transfer. If you elect to take distributions prior to turning 59 ½ years old unless you meet the criteria for an exception, funds will be subject to a 10% penalty.
The easiest method of moving funds from a SEP-IRA into a self-directed IRA like a Precious Metals IRA is via a custodian-to-custodian transfer. Simply open a self-directed IRA with a reputable, IRS-approved IRA custodian. This custodian then directly transfers the funds from the existing SEP IRA into the new IRA. Thereafter, said custodian will invest the funds as per instructions that you have provided. With a custodian-to-custodian transfer, you never touch the funds and the money transferred is not subject to any tax penalties.
SARSEP vs. Other Retirement Accounts
The table below compares the various types of retirement plans:
Plan Type Sponsorship Roth Option? Allows Precious Metals Stocks? Allows Precious Metals Bullion? Allows Other Alternative Investments Precious Metals IRA Individual Yes Yes Yes Yes Traditional IRA Individual Yes Yes No No 401(k) Employer Yes Maybe No No SEP IRA Self-employed or Business owner Yes Yes Maybe Maybe Solo 401(k) Self-employed Yes Yes Yes Maybe Simple IRA Employer Yes Yes Maybe Maybe Money Purchase Plan Employer No Maybe No No Profit Sharing Plan Employer No Maybe No No 457(b) Government or Non-governmental Tax-exempt Employer Yes Maybe No No SARSEP Employer No Yes Maybe Maybe Keogh Plan Self-Employed or Unincorporated Employer No Maybe No No Thrift Savings Plan (TSP) Government or Armed Services Employer Yes No No No ESOP Employer Yes Maybe No No Annuity Individual No Maybe No No
“Maybe” denotes where precious metals investment options are dependent upon the retirement vehicle provider.
SARSEP Contribution Limits
The Internal Revenue Agency (IRS) has stringent contribution limits for a SARSEP. Contributions for this retirement vehicle are both employee salary reduction contributions and nonelective employer contributions. The IRS regulations stipulate that employee salary reduction contributions cannot exceed $20,500, or be more than 25% of the total annual income.
The total contribution limits for 2022 (including both employee and employer contributions) cannot exceed $61,000, or be more than 25% of the total annual income.
SARSEP Calculator
A SEP IRA with a SARSEP can prove to be an excellent retirement investment choice because it is a tax-advantaged investment vehicle. There are numerous components that contribute to the amount of savings you set aside for retirement. Use this SEP-IRA Calculator to determine how much you could potentially save.
SEP IRA Within a SARSEP Providers
Fidelity SEP IRA
Fidelity has consistently been one of the highest-rated multinational financial services companies in the industry. A Fidelity SEP IRA offers tax-deferred growth and tax-deductible contributions with an array of investment options. You will also have access to a wide range of Fidelity research and investment tools with this retirement account.
Vanguard SEP IRA
A Vanguard SEP IRA is a popular investment choice for business owners or those who are self-employed. The company offers over 100 Vanguard mutual funds with this type of plan, including index funds, as well as Vanguard ETFs. Moreover, numerous mutual funds and ETFs are available from other companies, stocks, bonds, and CDs.
Charles Schwab SEP IRA
A Charles Schwab SEP IRA is another popular provider of this type of retirement vehicle. A SEP with this company involves no fees to open the account, nor for its maintenance. In addition, Schwab has no required minimum deposit and does not charge for commission.
SARSEP FAQs
What are the rules for a company to maintain a SARSEP?
As per the IRS rules pertaining to a SARSEP that was established prior to 1997, a company must meet the following requirements annually:
• “25 or fewer employees were eligible to participate in the SARSEP in the preceding year;
• At least 50% of the eligible employees choose to make salary reduction contributions this year; and
• The elective deferrals of highly compensated employees meet the SARSEP deferral percentage limitation.”
In addition, with a SARSEP, it is mandatory that all contributions be kept in an individual SEP-IRA established for each participating employee. Contributions for this type of retirement account are both employee salary reduction contributions and nonelective employer contributions.
How much can you contribute to a SEP-IRA within a SARSEP?
The Internal Revenue Agency (IRS) has stringent contribution limits for a SARSEP. Contributions for this retirement vehicle are both employee salary reduction contributions and nonelective employer contributions. The IRS regulations stipulate that employee salary reduction contributions cannot exceed $20,500, or be more than 25% of the total annual income.
The total contribution limits for 2022 (including both employee and employer contributions) cannot exceed $61,000, or be more than 25% of the total annual income.
SARSEP vs. SIMPLE IRA?
After January 1, 1997, SARSEPs were superseded by SIMPLE IRAs, as a component of the Small Business Job Protection Act of 1996. A Salary Reduction Simplified Employee Pension Plan (or SARSEP as it was referred to as) is a retirement vehicle that was available to small businesses with only 25 employees or less. SARSEPs established prior to 1997 can still be used. As per the Internal Revenue Service guidelines pertaining to these retirement accounts, “employers who established SARSEPs prior to January 1, 1997, can continue to maintain them and new employees of the employers hired after December 31, 1996, can participate in the existing SARSEPs”, as long as they have been employed by the company for three of the last five years.
Conversely, A SIMPLE IRA (Savings Incentive Match Plan for Employees) provides small businesses with 100 or fewer employees, the ability to offer retirement plans. Both the employer and employees can make contributions to this type of retirement account.
When can you withdraw from a SARSEP?
A SARSEP has the same withdrawal (or distribution) limitations as other types of retirement accounts. SARSEPS have a 10% early-withdrawal penalty on the funds if you make distributions prior to 59 ½, with the IRS making some exceptions in extenuating circumstances.
What types of gold can you invest in through a SARSEP?
Ultimately, the investment options available with a SEP IRA within a SARSEP are dependent upon your IRA custodian. However, these types of investments available to you with a SEP IRA within a SARSEP:
• Mutual funds
• Exchange-Traded Funds (ETFs)
• stocks
• bonds
• Options
• Certificates of Deposit (CDs)
• Real Estate
• Precious Metals Bullion
Unlike a traditional IRA, some SEP IRAs through a SARSEP can also be used to invest in alternative investments like IRS-approved precious metals bullion and real estate.
What are the benefits of dedicating 5-20% of your investment portfolio to precious metals like gold or silver bullion?
Investing in precious metals such as gold is an excellent hedge to protect your investment portfolio against economic uncertainties and inflation. A diversification strategy that includes gold (or other precious metals) not only protects your portfolio against market turmoil, but gold also provides significant growth potential. A simple method for diversification is to open a self-directed IRA.
What is IRA-approved gold or silver?
The Internal Revenue Agency (IRS) has stringent regulations on what types of gold and silver are permitted in an IRA. Essentially, the criteria include the purity levels of the gold or silver, and where it was minted. It is crucial to understand that only specific bullion coins and bars which meet IRA-approved purity levels are permitted in this type of retirement vehicle. Some examples of bullion coins that are approved by the IRS for investing in an IRA include American Eagles, Canadian Maple Leafs, and Austrian Philharmonic.
It is imperative to understand that the IRS does NOT permit things like collectible coins or numismatics as an IRA account. Any reputable IRA company will only recommend IRA-approved gold and silver bullion coins and bars. Be wary of any Gold IRA company that attempts to push collectible coins or numismatics as an investment option for an IRA - their intentions will be dubious.
What is a Gold IRA Company?
A Gold IRA company is a firm that acts as a custodian for the entirety of the process for setting up Gold IRAs (in addition to other Precious Metals IRAs). The process entails setting up the account, an IRA rollover or custodian-to-custodian transfer, purchasing IRA-approved precious metals, and storing precious metals in an accredited IRS-approved depository. Usually, Gold IRA companies have established relationships with traditional IRA custodians, IRS-approved accredited depositories, and precious metal dealers, which makes the process seamless for clients.
It is crucial to understand that under federal law if you open a self-directed IRA (including a Precious Metals IRA), you must have a custodian.
How do I choose the best Gold IRA company to invest with?
This is solely dependent on your personal preferences. What Gold IRA company you choose is contingent on what components are most important to you, whether it is storage options, ratings, or client services, amongst other factors. Once you have decided on your personal preferences, select numerous companies, then contact them to receive more information pertaining to both the respective firm and products offered.
What is an IRA Rollover?
Sometimes any movement of money from one retirement plan to another is often referred to as a “rollover”. However, the IRS has specific definitions for a rollover and a transfer. As per the IRS definition, a rollover occurs when the funds being moved are paid to you directly, and you then deposit the money into the other retirement vehicle
What are the IRS rules for an IRA Rollover?
The IRS has strict regulations and rules pertaining to an IRA Rollover. The guidelines outlined by the IRS for an IRA rollover include having 60 days to deposit the money you have received, in the custodian of your choice. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.
If you receive distributions from a retirement plan and you rollover into another retirement plan, as per the IRS rules there will be no taxation on those funds. In addition, funds can only be rolled over once in a 365-day period from a specific IRA.
What are the IRS rules for an IRA Transfer?
In a trustee-to-trustee transfer (as the IRS has deemed it) you request that the original IRA custodian transfers the funds to the new IRA custodian. With a trustee-to-trustee transfer, you never touch the funds and the money transferred is not subject to taxation.
