AD Banker Comprehensive Practice Exam

A SEP uses employer funded _______ accounts.

1. Defined Benefit

2. Profit Sharing

3. IRA

4. 401(k)

The correct answer is: IRA

A Simplified Employee Pension (SEP) is a type of retirement plan that allows employers to make contributions to individual retirement accounts (IRAs) set up for their employees. In a SEP, the employer is the one funding the IRA accounts, which are specifically designated as Traditional IRAs. The contributions made to these accounts are tax-deferred, meaning employees won’t pay taxes on the contributions until they withdraw funds in retirement. The other options refer to different forms of retirement plans. Defined Benefit plans typically promise a specific benefit at retirement, often based on salary and years of service, rather than relying on individual accounts funded by the employer. Profit Sharing plans allow contributions based on the company's profits, but again, they do not specifically fund individual IRA accounts. A 401(k) plan is another type of retirement savings plan that allows employees to contribute a portion of their salary to individual accounts, often with an employer match but structured differently than a SEP. Thus, the choice regarding employer-funded IRA accounts is the most accurate description of how a SEP operates.