What is a SEP IRA?

If you own a small business, it is still possible to give your employees the retirement benefits that they deserve by giving them an option to enroll in an SEP IRA. The SEP plan, which stands for Simplified Employee Pension, is a form of traditional Individual Retirement Account that gives employees at small companies and individuals who earn freelance income a vehicle to place money in that will grow on a tax-deferred basis, according to CNN Money. Read on and find out your savings options, the guidelines to opening an account, and how much you are able to contribute each year.

Purpose of the SEP Retirement Plan

Individual Retirement Accounts are tax-deferred investments that give the account holder a vehicle to save for retirement so that they can enjoy financial security later on in life. While many people know about the Roth IRA and the Traditional IRA, there are other options that simplify investment accounts for employers with less than 100 employees and for the self-employed who do not have access to a benefits department specialist.

The entire purpose of the SEP plan is to give employers a simplified method to contribute to retirement pensions and accounts, according to the IRS. These employers can even contribute to their own retirement for a secure channel that will grow without being taxed until it is time for withdrawal.

Who Is Eligible to Participate in an SEP Plan

To be eligible to establish an account, you must work for a business with less than 100 employees. Account holders also need to be at least 21 and have received $600 in salary in the tax year. Only employees who have worked for the eligible company for three of the last five years will be able to contribute to an SEP plan. Anyone is a non-resident alien or who is covered by a union agreement will be excluded from being eligible for the plan.

Contribution Limits of SEP IRA’s

As with any type of retirement account that is employer-sponsored, there are limitations as to how much you can contribute. While there are limitations, the limits are much higher for SEP plans, which makes it a more attractive option than the SIMPLE alternative for people who have a larger amount to put away.

Owners are able to contribute up to 25% of their annual income or up to $53,000 per year (whichever is smaller). Your employer have an option to contribute, but they can only contribute to their own accounts when they also do so to employee’s accounts. For those who are self-employed, there are special rules used in determining the limits.

How is the IRA Taxed

Just like a traditional IRA, your withdrawals will be tax when they are distributed. The contributions, however, are tax deductible. If you choose to take a withdrawal from your account before you reach the age of 59 1/2, you will pay the standard 10% penalty when you file your taxes the next year.

There are so many different ways to go about saving for retirement, but some are more complex than others. If you want to take a conservative approach to retirement and you own a small business, ask about SEP plan options and see if this is something you would like to offer. With an SEP IRA, you can put money away and match contributions for yourself and for your employees as well.

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