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What is a SEP IRA?

A SEP IRA, or Simplified Employee Pension Individual Retirement Account, is a type of retirement savings plan designed primarily for self-employed individuals and small business owners. It allows employers to contribute to their own retirement and their employees’ retirement seamlessly, enabling significant tax advantages and easy setups compared to traditional IRAs.

Key Features

  • Contribution Limits: In 2023, employers can contribute up to 25% of an employee’s compensation, capped at $66,000, making it an appealing option for business owners wanting to save for retirement.
  • Tax Benefits: Contributions made to a SEP IRA are tax-deductible, reducing taxable income for the year. Funds grow tax-deferred until withdrawal during retirement.
  • Flexible Contributions: Employers are not obligated to contribute every year, allowing financial flexibility to adjust contributions based on the business's performance.
  • Employee Participation: All eligible employees, including part-time workers, must receive the same percentage contribution, promoting fairness.

Accessibility

Setting up a SEP IRA is straightforward; it requires minimal paperwork compared to other retirement plans. This simplicity appeals to many small business owners, allowing them to focus on running their business while saving for the future. Additionally, funds can be invested in various assets, such as stocks, bonds, and mutual funds, offering growth opportunities.

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