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SEP vs Profit Sharing

Guest JimJ

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I have two questions in which I could use some help on. (I know nothing about SEP IRA's)

Background Information:

a) 2 person sole prop - now incorporated

b) accountant stated that once incorporated should now get rid of sep and create a p/s plan

My Questions:

1) Must an organization terminate their SEP when they become incorporated? If yes, why?

2) If no, what advantages are gained by doings so and creating a profit sharing plan once incorporated?

Thank you in advance for any help on this matter.


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  • 2 weeks later...

The existing SEP can be adopted (signed) by the new employer. The sponsor of the document should be made aware of what is happening. They may even have a form for the adoption by the new entity. There are many factors which determine the better plan. If the need of the employer, for example, is to exclude people not in their 4th service year, a SEP is better. OTOH, if those people complete less than 1,000 hours of service in a 12 month period (generally from date of hire and in plan years thereafter) they would likewise be excluded. More money can be placed in a P/S plan than a SEP. Perhaps, you can ask the CPA why he believes one is better than the other for this client. Also, SEPs do not receive adequate creditor protection in all states. If simplification and lack of burdensome administration is desired, then think SEP and SIMPLE.

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