SEP IRA Basics
1. What is a SEP IRA, and how does it work?
A SEP IRA, or Simplified Employee Pension Individual Retirement Account, is a type of retirement savings account that allows employers, including self-employed individuals, to make tax-deductible contributions on behalf of themselves and their employees.
SEP IRAs are popular among small businesses because they are relatively easy and inexpensive to set up and administer. In a SEP IRA, the employer contributes a percentage of each eligible employee's compensation, up to a specified limit, to the employee's individual SEP IRA account. The contributions are tax-deductible for the employer and grow tax-deferred in the employee's account until retirement.
2. Who is eligible for a SEP IRA?
Employers, including self-employed individuals and their employees.
3. What are the SEP IRA contribution limits for 2023?
$66,000 is the SEP IRA contribution limit in 2023.
4. How can someone set up a SEP IRA?
A SEP IRA can be set up by talking with a financial advisor specializing in small business retirement plans. A retirement plan could also be set up by going direct to a retirement plan custodian, but this often involves more work by the business owner.
There are three important steps to setting up a SEP IRA plan. First, a written plan document needs to be executed to form the plan. Then, the benefit information needs to be distributed to all employees. Finally, an account will need to be set up for any employee participating in the plan.
5. What are some pros and cons of a SEP IRA?
Some pros are that SEP IRA contributions reduce taxable income, allow for tax-deferred compounding growth, and allow high contribution limits. One of the advantages of a SEP IRA is its flexibility. The employer can adjust the amount of the contribution from year to year based on business performance and other factors. However, there are certain rules and restrictions regarding contributions and withdrawals that must be followed.
While SEP IRAs are a popular retirement plan among small business owners, the main drawback to the business owner is that employees don’t make their own contributions. This means the business owner is 100% responsible for the employee account contributions.
6. What are some SEP IRA alternatives?
Popular SEP IRA alternatives are the SIMPLE IRA and a 401(k) plan.
7. Can you invest in a SEP IRA in addition to other retirement accounts?
Yes, you can invest in a SEP IRA in addition to other retirement accounts as long as the plans are offered by separate companies.
