Is a SEP IRA right for you?
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Build retirement savings and reduce income taxes with a simplified employee pension—even if you’re self-employed.
If you’re a business owner looking for a way to reduce income taxes, a simplified employee pension (SEP) IRA may be right for you.
What’s a SEP IRA and how much can I contribute?
SEP IRAs allow an employer (that’s you, if you’re self-employed) to make tax-deductible contributions to a retirement savings account. They’re used by sole proprietors, partnerships and corporations. A key advantage of SEP IRAs is the generous contributions limit.
In 2021, contributions can’t exceed 25% of compensation or $58,000, whichever is less. (There’s still time to set up an account and make up to $57,000 in contributions for 2020 with this year’s tax filing deadline extended to May 17.)
SEP IRAs are especially helpful if you’re behind on retirement savings, since IRAs are limited to a maximum of $6,000, or $7,000 if you’re 50 or over.
You can use a SEP IRA even if you have another retirement plan
You can contribute to a SEP IRA in addition to a traditional IRA. To see how big your combined contributions might be, let’s say you have income from your business of $290,000 in 2021. You could save $64,000 ($65,000 if you’re 50 or over) for retirement in a single year by maxing out contributions to both a SEP and traditional IRA. Compensation over $290,000 is not counted for calculating SEP IRA contributions.1
Participating in an employer plan and also earning money through self-employment? You can also make contributions to a SEP IRA. Your contribution will be calculated on your business income, not your employment income.
Flexible from year to year
There’s no set amount you have to contribute each year, making SEP IRAs a very flexible tool for reducing income and saving for retirement.
How employee contributions work
If you have employees, a uniform amount must be contributed to all eligible employees. That means if you contribute 10% of your base salary, each eligible employee gets a contribution of 10% of their base salary. SEP IRA funds are always 100% vested by employees.
According to the IRS, employees must be included in the SEP plan if they are 21, worked for you in at least three of the last five years, and received at least $650 in compensation in 2021. A plan can have less restrictive eligibility if an employer chooses to do so. Learn more by reading these SEP IRA FAQs and operating rules from the IRS.
Open Your SEP IRA
Establishing a SEP IRA can be a great move for reducing income taxes and building retirement savings. Talk to a trusted tax consultant or financial advisor to make sure you understand all the rules before setting one up.
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