Retirement planning is a key part of any financial plan. One type of retirement plan that is gaining popularity among small business owners and self-employed individuals is the SEP IRA. SEP stands for Simplified Employee Pension, and it offers a great way to save for retirement while reducing your taxable income. Let’s take a look at how this works.
What Is A SEP IRA?
This is an employer-sponsored retirement plan that allows small businesses and self-employed individuals to contribute up to 25% of their net earnings, or $58,000 (whichever is less) each year. The contributions are tax-deductible, so they reduce your taxable income and help you save money on taxes. Additionally, the money in the account accumulates tax-free, meaning you don’t have to pay taxes until you withdraw the funds during retirement.
Who Is Eligible?
Any business owner with one or more employees can set up an account for themselves and their employees. Employees must be at least 21 years old and have worked for the company for three out of the five most recent years in order to be eligible for contributions from the employer. If you are self-employed, you are also eligible to open an account as long as you meet the eligibility requirements outlined by your state or federal government.
Advantages
One of the biggest advantages of this account is that it’s relatively easy to set up compared to other retirement plans like 401(k)s, which require extensive paperwork and administrative costs. Additionally, contributions are flexible; employers can decide each year how much they want to contribute if anything at all. Finally, because contributions are made pre-tax, you get an immediate tax deduction when you make them.
A SEP IRA is an excellent way for small business owners and self-employed individuals to save for retirement while reducing their taxable income in any given year. The setup process is relatively simple compared to other types of employer-sponsored plans like 401(k)s, and there’s no annual filing requirement either. With its flexible contribution limits and generous pre-tax deduction opportunities, setting up this account could be just what your financial portfolio needs.
