Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

In a Simplified Employee Pension (SEP) Plan, where do employer contributions go?

1. Employee's individual Roth IRA

2. Employee's individual SEP-IRA

3. Employee's Health Savings Account

4. Employee's Traditional IRA

The correct answer is: Employee's individual SEP-IRA

In a Simplified Employee Pension (SEP) Plan, employer contributions are directed into the employee's individual SEP-IRA. This specific type of Individual Retirement Account (IRA) allows employers to contribute on a tax-deferred basis, benefiting both the employer and the employee regarding tax treatment and retirement savings. The SEP-IRA is distinct from other retirement accounts, such as a Traditional IRA or a Roth IRA, because it is designed explicitly for employer contributions and simplifies the process for small businesses to provide retirement benefits. Contributions made to a SEP-IRA are subject to annual contribution limits set by the IRS, which allows for larger contributions compared to traditional employee-sponsored plans. By placing contributions directly into a SEP-IRA, these funds are set aside for retirement and can grow tax-deferred until the employee withdraws them, generally at retirement. This arrangement is advantageous for both the employer, who enjoys a simplified contribution process, and the employee, who can benefit from potentially higher contribution limits compared to other retirement plans.