A simplified employee pension (SEP) IRA is a retirement savings plan established by employers—including self-employed people—for the benefit of their employees and themselves. Employers may make tax-deductible contributions on behalf of eligible employees to their SEP IRAs.
There are many advantages for a business to set up a SEP IRA:
- There is only a little paperwork and low start-up costs to initiate a plan. The employer is able to contribute for him/herself and employees– these contributions are generally tax-deductible to the business.
- Higher contributions amounts are available.The maximum contribution limit for 2020 is $57,000 or 25% of employees’ eligible compensation (20% of your net earnings if contributing to your own account as sole proprietor), whichever is less. Contributions are only be made by the employer — employees cannot make salary deferral contributions to a SEP IRA — and again are generally tax-deductible for the business.
- Contributions and employee requirements are adjustable from year to year.SEP IRAs offer the flexibility to contribute more when business is strong and cut back when things are tighter. For eligibility requirements, you can adhere to the IRS’s standard requirements or follow less restrictive rules.
All contributions into a SEP IRA are pre-tax contributions—meaning that when they are eventually withdrawn, both the contributions, as well as any investment gains, are taxed at the income tax bracket of the participant.
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