The Simplified Employee Pension IRA can be an important benefit in your tax arsenal if you are an employer and a great retirement plan if you are an employee or self-employed. Here are some of the most crucial facts about the SEP IRA, based on the IRS Tax Code and this article by Selena Maranjian.
Probably the biggest single advantage of the SEP IRA: the hefty contribution limits compared to other IRA plans. For the 2017 tax year, the employer may contribute up to the lesser of 25% of the employee salary or $54,000. These limits offer a significant advantage over typical IRA limits of $5500.
The employer makes the only contributions to the SEP IRA. Employees do not contribute.
These high limits offer flexibility to the employer. When company cash flow is greater, the employer has the option to contribute more. When it is lower, the employer may contribute less if desired.
These contributions are made on a pretax basis for the employee, thus lowering taxable income.
Loans from SEP IRAs are not allowed.
SEP IRAs vest immediately for the employee, so they are always 100% vested.
Self-employed people are eligible for the SEP IRA. This can be a great way to save for retirement.
Like the traditional IRA, you must begin taking required minimum distributions at age 70 1/2, although you may begin withdrawals at 59 1/2 without penalty.
The SEP IRA is easy to set up and offers a wide variety of investment options, much more than the typical 401 K plan.
It's not too late to make a contribution for the tax year 2017! Contributions may be made until April 15th.
For all of these reasons, if you are self-employed or run a small business which does not offer a retirement plan, the SEP IRA may be the right option for you. But of course, these are only highlights of complex tax laws. Tax situations should be examined in their totality for each individual and business entity. Accurate and complete tax advice is now available from the professionals at Foster Financial CPA.