Simplified Employee Pension (SEP) IRA
Offering employees a good retirement plan can go a long way in attracting and retaining employees. It can also be cost-prohibitive if you’re a small business or sole proprietor. With a Simplified Employee Pension (SEP) IRA, small business owners can offer an employer-funded retirement plan that won’t break the bank.
How a SEP IRA works
SEP IRAs are commonly used to provide retirement benefits for business owners and their employees. These plans can be adopted by self-employed individuals with or without employees. In the event there are employees, each would receive the same benefits under the SEP plan. For detailed contribution limits and requirements, visit the IRS site.
Benefits of a SEP IRA
These plans share many similarities with a Traditional IRA since contributions are tax-deductible and can reduce income tax liability for the current year. In addition, funds are taxed at regular income tax rates for withdrawals after the age of 59½. Other benefits of a SEP IRA include:
- Funds can be treated and invested like any other IRA
- No mandatory or minimum contributions
- Contributions are tax-deductible
- Tax-deferred growth potential
- No complicated forms to fill out or annual IRS reports to file
Things to consider
- Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty. You may also owe an excise tax if you do not begin to withdraw minimum required distributions by April 1 in the year after you turn age 70½.
- To be eligible for a SEP IRA you must be a sole proprietor, a business owner, in a partnership, or earn self-employment income by providing a service. Additionally, each employee must open a separate SEP IRA account.