SEP IRA

A SEP IRA, or Simplified Employee Pension Individual Retirement Account, is a type of retirement account that is available to self-employed individuals, small business owners, and their employees.

With a SEP IRA, the employer makes contributions to the account on behalf of the employee, which are tax-deductible as a business expense. The employee does not make contributions directly to the account, but can receive distributions from the account in retirement.

Contributions to a SEP IRA are limited to a certain percentage of the employee's compensation or a fixed dollar amount, whichever is less. 

As of 2021, the maximum contribution limit is 25% of compensation or $58,000, whichever is less.

One advantage of a SEP IRA is that it is easy to set up and maintain. There are no annual filing requirements or administrative costs, making it an attractive option for small business owners.

 Additionally, the funds in a SEP IRA grow tax-deferred, meaning that the account holder does not pay taxes on the contributions or earnings until they withdraw funds from the account in retirement.

 Overall, a SEP IRA can be a useful retirement savings tool for self-employed individuals and small business owners who want to provide retirement benefits to their employees while also saving for their own retirement. 

Did you know that SEP IRA contributions can be made up until the tax filing deadline, including extensions? 

Unlike traditional IRAs, which have a contribution deadline of April 15th of the following year, SEP IRA contributions can be made up until the tax filing deadline, which is typically in mid-October for individuals who file for an extension.

 This can be helpful for business owners who may not know their business income for the year until later in the year or who need to wait until after the tax year ends to make contributions. 

Additionally, the extended deadline can provide an opportunity for individuals to make catch-up contributions if they were unable to contribute the full amount by the original deadline. 

John is a self-employed graphic designer who runs his own business.

 He has a few employees who work for him on a part-time basis. John wants to provide retirement benefits for himself and his employees, but he is not sure which retirement plan to choose.

After consulting with his accountant, John decides to open a SEP IRA account for himself and his employees. 

He likes that the contributions to the account are tax-deductible as a business expense and that the funds in the account grow tax-deferred.

John sets up the SEP IRA account with a financial institution and begins making contributions to the account on behalf of himself and his employees. 

He contributes the maximum amount allowed by law each year, which is based on a percentage of compensation.

Over time, the funds in the SEP IRA account grow, thanks to the tax-deferred growth and John's regular contributions. 

When John reaches retirement age, he begins taking distributions from the account to supplement his retirement income.

One of John's employees, Sarah, also takes advantage of the SEP IRA account and begins contributing to the account as well. 

She likes that the contributions are made on a pre-tax basis, which lowers her taxable income each year.

After several years, John decides to sell his business and retire. 

He is able to use the funds in his SEP IRA account to supplement his retirement income and achieve his retirement goals. 

Sarah continues to work for the new owner of the business and is able to keep contributing to the SEP IRA account until she retires.

Overall, the SEP IRA account provides John and his employees with a flexible and tax-advantaged way to save for retirement and achieve their retirement goals.