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2003 tax returns will be due soon. It’s not too late for your clients who own small businesses to generate a 2003 tax deduction and credit while providing retirement savings for themselves and their employees. Your client can still establish and fund a SEP-IRA plan up until the 2003 tax return due date, with extensions (i.e., at least until April 15, 2004 for most people). A SEP may work well for an employer either with or without employees, because of its high contribution limit, low cost and easy administration.

A SEP is a Simplified Employee Pension (not to be confused with a SIMPLE). Any type of business entity (corporation, LLC, partnership, sole proprietorship, etc) can set up a SEP, and there are no limits on the number of employees.

The operation of a SEP is straight-forward: Each employee sets up an IRA. The employer can make a deductible contribution to each employee's IRA each year, as long as each employee receives the same percent of compensation (much like a profit sharing plan). The employer can change the percentage year to year, or even skip contributions, if the business needs dictate. The employer doesn't have to cover employees who are under 21, who have not worked for the employer 3 of the last 5 years, or who make less than $450 per year (2003). The plan cannot exclude employees over 70 ½. If your client is over 70 ½ and self-employed, then, he can contribute to a SEP even though he wouldn't be able to contribute to a traditional IRA.

The most an employer can contribute to an employee's SEP IRA is 25% of the employee's income, up to $40,000.

Self-employed people may especially like the simplicity and flexibility of a SEP. A SEP allows you to make the same contribution as the more expensive and complicated 401(k) plan if income exceeds $200,000 (for both plans, you would reach the $40,000 limit). You should be aware, though, that the contribution limit for a self-employed person ends up being 20%, not 25%. This is caused by a circular calculation: You can contribute 25% of your net income, after you have deducted off your contribution. This sounds confusing and it is, but the math works out that you can contribute 20% of your income.

Here's a demonstration: Suppose you make $100,000 net earnings from self-employment, and want to make the maximum 25% contribution. As it works out, you can contribute $20,000 to your SEP. Here's why: $20,000 is 25% of the $80,000 you have left after deducting your $20,000
contribution from your $100,000 income.

"Net earnings from self-employment" is your net profit minus half of your self-employment tax.

You can find an explanation and worksheet for how to figure the amount of the SEP contribution for a self-employed person beginning on page 63 of IRS Publication 590 (Rev 2002). You can get this publication from the IRS website www.irs.ustreas.gov, and enter 590 in the "Search Forms
and Publications for" box in the left column.

Employees may also make their traditional IRA contributions into their SEP IRA (and they can still do this until their tax returns are due). However, they must follow the income limits for those participating in a retirement plan. The ability to deduct a traditional IRA contribution for someone participating in a retirement plan is phased out between $60,000 and $70,000 for joint filers, and between $40,000 and $50,000 for single filers.

You may have heard of SARSEPs, which look like 401(k)s in that employees can make elective deferrals. You can no longer start a new SARSEP, but for those plans established before December 31, 1996, employees can make an elective deferral to it of up to $12,000 for people under 50 or $14,000 for age 50 and older. SARSEPs were replaced with SIMPLEs beginning in 1997.

SEPs can be easy to set up and administer. If the SEP is your client's only retirement plan, his tax advisor may suggest that he use the IRS' Form 53 05-SEP to establish the plan rather than having the attorney draft a plan from scratch. The 5305 must be reviewed, signed and kept on record, but it is not filed with the IRS. The SEP does not require nondiscrimination testing, and the IRS also does not require annual 5500 reporting.

An employer with at least one non-highly compensated employee may be eligible for a tax credit (as opposed to deduction) up to $500 for the costs of establishing a SEP this year. (This is a different from the deduction for the contributions.) If you have not had a retirement plan in the past three years, you can take a credit of up to half the start up costs of the plan, up to $500, in each of the first three years of the plan. The credit can offset 50% of the costs for: * Startup and administration.
* Employee education on retirement saving using the plan business qualifies for this credit if it employs 100 or fewer people who earn at least $5,000. Also, the employer can't have had a retirement plan in the three years (2000-2002) prior to establishing the SEP. If a business takes the credit, it cannot deduct those costs.

Finally, distribution rules from SEPs are the same as for other traditional IRAs. Your client can take a distribution at any time, but if she is under 59 ½ she will owe a 10% penalty on premature
distributions unless an exception (death, disability, equal payments, etc) applies. She must begin to take a minimum required distribution by April 1 of the calendar year after reaching age 70 ½, even if her employer is still making contributions to her account.


Margaret A. Kruse
Integrity Life Insurance Company


This material reflects Integrity Life Insurance Company's understanding of the current federal tax laws and contains information of a general
nature. The information provided is not intended to be legal or tax advice. Integrity suggest you or your clients consult a tax advisor or
attorney as to the applicability of this material or a specific situation.


For more detail on Integrity Life Annuities please contact the Integrity Life Sales desk at 800-666-7040 to obtain a prospectus.
Products are issued by Integrity Life Insurance Company, Cincinnati, Ohio. Products sold in New York, Vermont and New Hampshire are issued
by National Integrity Life Insurance Company, Goshen, NY. All products distributed by Touchstone Securities, Inc. Cincinnati, OH member
NASD/SIPC.







Last Updated: 11/19/2003 12:34:00 AM