What Is a SEP IRA?

what is a SEP IRARegardless of how much your business makes, saving for retirement is important. To help with your retirement planning, you can set up a Simplified Employee Pension (SEP) IRA.
You might be wondering, “What is a SEP plan?” SEP IRAs give business owners tax breaks for putting money aside for their retirement. You can also use this retirement plan to contribute to your employees’ retirement savings.

How Does a SEP IRA Work?

how does a SEP IRA workSEP IRAs are funded by employer contributions. They work like other IRA retirement plans when it comes to investing, distribution and rollovers. With SEP IRAs:
  • The money you put into the account is tax deductible
  • A person, not your business, is in charge of the assets
  • Investments grow tax deferred
From contribution limits to when you can withdraw your money, here are some important things to keep in mind about SEP IRAs:
  • Proportional contributions: IRS rules say everyone’s contributions have to be the same percentage. So, if you put in 15% of your pay, you also have to contribute 15% of your employees’ pay.
  • Contribution limits: Total contributions can’t be more than 25% of your pay or a maximum that varies by tax year.1
  • Tax-deductible contributions: You can deduct your contributions each year, which reduces your taxable income.
  • Contribution flexibility: If you want to stop contributing one year, you can.
  • Roth option not available: A Roth IRA allows you to fund the account with after-tax dollars. So, you won’t pay income taxes on money you take out in retirement. With SEP IRAs, you don’t have that option.
  • Distribution age: If you make a withdrawal before you’re 59½, you’ll have to pay a penalty and income taxes on the amount. And when you turn 70½, you have to take the required minimum distribution for your plan.
  • Combinable with traditional and Roth IRAs: If you’re eligible, you can open a SEP IRA at the same time as other retirement accounts, like a traditional or Roth IRA plan. This gives you more ways to save for your retirement.
  • No catch-up contributions: Certain retirement savings plans, like traditional IRAs, let people aged 50 or older make additional contributions. You can’t do this with SEP IRAs.

Who Is Eligible for a SEP IRA?

Business owners and certain employees are eligible for SEP IRAs. According to IRS rules, you’ll have to include your employees in your SEP IRA if they:
  • Are at least 21 years old
  • Worked for you for three of the last five years
  • Earned at least $600 in the past year
What is a SEP planWhile you can put more money towards your retirement compared to other savings plans, there are some downsides to SEP IRAs. For example, you or your employees can’t participate in SEP IRAs if:
  • Your employees are part of a union
  • Anyone has an income higher than $285,000

Investing Through SEP IRAs

When you set up your SEP IRA and put funds into it, you can invest the money. SEP IRAs follow the same investment rules as a traditional IRA. For example, this means you:
  • Can’t invest your money in collectibles, such as artwork or antiques
  • May not be able to invest your money in real estate
  • Shouldn’t report losses and gains on your tax returns if your account is still open
Your investment options can depend on your:
  • Edad
  • Planned retirement age
  • Risk tolerance
SEP retirement planFor example, if you’re younger, you may be more willing to take on a risk by investing in stocks. But, if you’re closer to retiring, you may want to put your investments in bonds.
You can visit the IRS website to learn more about IRA investment rules.

How Can I Set Up a SEP Retirement Plan?

You can set up a SEP retirement plan in a few easy steps.
  1. Find a provider to hold your SEP IRA.
  2. Complete Form 5305-SEP, which formalizes your agreement to open an account.
  3. Give the same form to your eligible employees to let them know about the SEP IRA.
  4. Set up an individual retirement account for each employee.
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Game Plan

For details on establishing a SEP, along with rules on participation, compensation, contributions, distributions, and more, review these SEP plan FAQs from the IRS.
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