A SEP IRA is a retirement savings plan that allows businesses to make contributions on behalf of their employees. It is similar to a traditional IRA, but has higher contribution limits and can be easier to set up and maintain.
SEP IRAs are an attractive option for small businesses because they offer a way to provide retirement benefits to employees without the hassle and expense of setting up and administering a traditional pension plan. Additionally, SEP IRAs allow business owners to deduct their contributions from their taxes.
If you’re self-employed or own a small business, a SEP IRA can be a great way to save for retirement. Here’s what you need to know about how SEP IRAs work.
Contributions: Employers can contribute up to 25% of an employee’s salary (up to a maximum of $53,000 for 2019) into a SEP IRA on the employee’s behalf.
Deductibility: Employer contributions to a SEP IRA are tax-deductible.
Investment options: Employees can choose to invest their SEP IRA funds in a variety of investment options, including stocks, bonds, and mutual funds.
Withdrawals: Employees can begin taking withdrawals from their SEP IRA at age 59 1/2. Early withdrawals may be subject to income taxes and a 10% penalty.
Roth option: Some SEP IRA plans offer the option to make Roth contributions, which are not tax-deductible, but grow tax-free. Withdrawals from a Roth SEP IRA are also tax-free.
Eligibility: To be eligible to contribute to a SEP IRA, an employee must be at least 21 years old and have worked for the company for at least three of the past five years.
Contribution limits: The maximum contribution that an employer can make to an employee’s SEP IRA is 25% of the employee’s salary (up to a maximum of $53,000 for 2019).