A SEP IRA, or Simplified Employee Pension Individual Retirement Arrangement, is a type of retirement plan that an employer or self-employed individuals can establish. The employer is allowed a tax deduction for contributions made and employees don’t pay taxes on contributions until they start making withdrawals during retirement. The contributions are invested and can grow tax-deferred until the money is withdrawn.
The big advantage of a SEP IRA for self-employed individuals or small business owners is the higher contribution limit compared to traditional IRAs. For 2021, the limit is 25% of compensation, or $58,000, whichever is less. This can make a big difference for those who want to save more for retirement.
Related Questions
1. How does a SEP IRA work for self-employed individuals?
For self-employed individuals, a SEP IRA allows them to contribute a portion of their net earnings to their own retirement savings. The contributions are tax-deductible, reducing their taxable income for the year. The money can be invested and grows tax-deferred until it is withdrawn.
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2. Who can contribute to a SEP IRA?
Only employers can contribute to a SEP IRA. This includes self-employed individuals, who are considered both employer and employee. Employees cannot contribute to their SEP IRAs, unlike Traditional or Roth IRAs.
3. When can you start withdrawing from a SEP IRA?
You can start withdrawing from a SEP IRA at age 59.5. If you make withdrawals before this age, you may have to pay an additional 10% in taxes as an early withdrawal penalty.
4. Is there a deadline to set up a SEP IRA?
Yes, there is a deadline to set up a SEP IRA. You can establish and fund a SEP IRA for a given tax year up until the tax filing deadline of the following year, including extensions.
5. How much can an employer contribute to a SEP IRA?
An employer can contribute up to the less of 25% of an employee’s compensation or $58,000 for 2021. Note, this limit may be adjusted annually for inflation.