SEP IRA stands for Simplified Employee Pension Individual Retirement Account. It is a type of retirement savings account. It is a useful tool for small business owners to fund retirement for themselves and their employees. In this article, we will go over SEP IRA basics is right for you.

The Basics

To create a SEP IRA account for yourself or your employees, eligibility requirements must be met. First, account holders must be 21 years of age or older. Second, the employees must have worked for the company for at least three out of the last five years. Third, the minimum income to be an eligible account holder is $750.00 for 2023.

Setting Up and Contributing to a SEP IRA

You will need to contact a plan administrator to set up SEP IRA accounts for yourself and your employees. Once the accounts are set up you can begin making contributions on behalf of yourself and your employees. Whatever you contribute to your account, you must contribute a proportionate amount to your employee’s accounts. Annual contributions are limited to $66,000 in 2023. Any funds can be further invested into stocks, bonds, and mutual funds to increase growth.

Pros and Cons

The biggest benefit of a SEP IRA is the high contribution limit of $66,000. These contributions are tax-deductible, including the contributions you make to employee accounts. Additionally, these plans are easy to set up and administer.

As will all investment vehicles, there are downsides to SEP IRAs. First, if you are over 50 there are no provisions for catch-up contributions like many other retirement accounts have. Second. They are not eligible for Roth conversions. Which would allow you to pay taxes now and take tax-free distributions in retirement. Third, if you have employees, you must make proportionate contributions to them anytime you contribute for yourself.

Investing in a SEP IRA

If you feel like a SEP IRA is right for you, a qualified investment advisor can assist you in setting up the account. They can also help you analyze how doing so will help reduce your tax liability now and increase your retirement savings for the future.

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