What Is a SEP IRA and How Does It Work?
SEP IRAs are a type of retirement savings plan that small employers can set up for their employees. It is a great way to save money for your future, and it allows you to take advantage of tax benefits. In this article, we will discuss what SEP IRAs are and how they work to decide if this is the right option for you.
What Is a SEP IRA?
A SEP IRA is a Simplified Employee Pension individual retirement account. This means that you can open an IRA for yourself or as an employer to benefit your employees who are eligible to participate in the plan. SEPs are easy to set up, have low administrative costs, and allow employers to choose how much money to contribute each year. SEP IRA contribution limits are higher than traditional IRA contribution limits. A SEP IRA is essentially a traditional IRA with the ability to accept contributions from employers. The fact that employer contributions to a SEP IRA are immediately vested is a significant advantage.
Who Is Eligible To Participate in a SEP IRA?
Almost any employee of a business that has established a SEP IRA qualifies. This includes part-time employees, seasonal employees, and independent contractors who meet specific criteria within the last three years. Employee SEP-IRAs are available to individuals who are at least 21 years old, have worked for the employer for at least three of the preceding five years, and have received at least $600 in compensation from the employer in the current year.
SEP IRA is best for self-employed people or owners of small businesses with just a few (or no) employees because of the rule requiring equal contributions as a percentage of compensation. Due to the fact that SEP IRAs vest immediately, the employee owns and controls their account from the start. If you have qualified applicants, you must contribute on their behalf. Employers are required to contribute the same percentage of their employees' wages as employees do.
Employers may exclude specific categories of employees from SEP IRA participation, even if they would otherwise qualify under the plan's rules. Workers covered by a union agreement that bargains for retirement benefits and undocumented workers may be excluded as long as they do not receive wages or other service compensation from the employer in the United States.
How a SEP IRA Works
If you are self-employed, you can use the SEP IRA to set aside money for your retirement. You can contribute up to 25% of your compensation or $57,000 (whichever is smaller) each year into an account on behalf of yourself. Employers who have employees must also allow those workers to contribute toward their accounts with at least as much as you put in for yourself. This means that if you contribute 15% of your salary, they must be allowed to save 15%. However, there is no requirement that you match what they put in.
SEP IRAs are taxed similarly to traditional IRAs and offer the same investment options. SEP IRAs are subject to the same transfer and rollover rules as traditional IRAs. When an employer contributes to SEP IRA accounts, the employer receives a tax deduction for the contribution amount. Additionally, the business is not obligated to make annual contribution decisions about how much to contribute each year.
What Are the Tax Implications of a SEP IRA?
SEP IRAs are a tax-efficient way for you and your employees to save for retirement. Employer contributions to employee plans can be deducted, but not more than 25% of total compensation. Amounts not covered by contributions can be deducted from the plan's manager's fees. Contribution earnings are generally tax-free until you or your employees receive distributions. You can contribute up to the tax filing deadline, including extensions if you are self-employed. You can deduct contributions to your plan until April of the following year or until October 15 if you file an extension.
What Are the Contribution Limits?
The annual contribution limit is one significant advantage of a SEP IRA. Contributions could not exceed 25% of the employee's annual salary or $57,000 in 2020. The cap increased to $58,000 in 2021. This contribution limit is significantly higher than the $6,000 limit on standard IRAs (not including the $1,000 catch-up contribution allowed to anyone aged 50 or over). Contributions are due by the company or self-employed individual that establishes the SEP IRA's tax filing deadline (plus extensions).
Is a SEP-IRA Right For You?
While you won't deduct contributions you make into a SEP IRA, you can still benefit from tax-deferred growth. You may also enjoy more investment flexibility when establishing a SEP thanks to the wide variety of investments you have available through your financial institution or brokerage firm. If you're self-employed and have employees, a SEP IRA is an excellent way for you and your employees to save more towards retirement.
Contact a Tax Professional
If you're looking for a way to save for retirement, then you may be looking to participate in SEP IRA.
The Simplified Employee Pension Individual Retirement Account (SEP IRA) is an employer-sponsored plan that allows small business owners and self-employed individuals to contribute up to 25% of their annual income into a tax-deferred account.
With CORE Group's help, we can set up your SEP IRA in just a few easy steps. You don't have to worry about filing taxes or keeping track of contributions because it will all be done automatically. And, if you need any assistance along the way, our team is here 24/7, ready to help with anything from answering questions about how much money should go into your account each month to what type of investments are best suited for your needs, and more. We want every client who comes through our doors as happy as possible, so let us know how we can make this process even easier on you.
Contact us now and get started with CORE Group today!