Simplified Employee Pension (SEP) IRA
A Simplified Employee Pension (SEP) IRA is a type of retirement plan that allows employers to make tax-deductible contributions on behalf of eligible employees, including themselves if they are self-employed. It is designed for small businesses and self-employed individuals, offering a streamlined way to save for retirement with minimal administrative burden.
Employers set up a SEP IRA by creating a written agreement and funding the accounts. Contributions are made by the employer only and can vary each year, with a maximum limit set by the IRS. For 2023, the contribution limit is the lesser of 25% of an employee’s compensation or $66,000. Employees can also roll over funds from other retirement accounts into a SEP IRA.
The contributions grow tax-deferred until withdrawal, and employees can withdraw funds without penalties after reaching age 59½. However, early withdrawals may incur additional taxes. SEP IRAs are less complex than traditional retirement plans, making them an attractive option for small business owners seeking to provide retirement benefits.