What is a SEP IRA?
A Simplified Employee Pension (SEP) IRA is a type of retirement savings account that allows employers to make contributions on behalf of their employees, including themselves if they are self-employed. It’s primarily designed for small businesses and self-employed individuals, making it a popular choice for freelancers and independent contractors.
Key Features
- Contribution Limits: Employers can contribute up to 25% of an employee’s compensation, capped at a limit of $66,000 for 2023.
- Eligibility: Any business owner, including sole proprietors, partnerships, and corporations, can set up a SEP IRA.
- Tax Benefits: Contributions are tax-deductible for the business, and the earnings grow tax-deferred until retirement withdrawals.
Advantages
SEP IRAs are easier to administer than other retirement plans, require minimal paperwork, and offer flexible contribution options. This feature is beneficial in years with fluctuating revenues.
Considerations
It's essential to remember that only the employer can contribute to a SEP IRA, and contributions must be made equally across all eligible employees. Withdrawals made before age 59½ may incur a 10% penalty.
In summary, a SEP IRA is an effective way for small businesses and self-employed individuals to save for retirement with higher contribution limits and tax benefits.