What is a SEP IRA, and who are they for?

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a retirement savings plan available to business owners and self-employed individuals. Here's a breakdown of what a SEP IRA is and who can open one:

What is a SEP IRA?

1. Employer-Funded Retirement Plan: The employer funds A SEP IRA. Unlike Traditional IRAs or 401(k)s, employees do not contribute to this account.
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2. High Contribution Limits: One of the key advantages of a SEP IRA is its high contribution limit. For 2024, employers can contribute up to 25% of an employee’s income or $69,000, whichever is less. This is significantly higher than the limits for Traditional and Roth IRAs.
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3. Tax Benefits: Contributions to a SEP IRA are tax-deductible for the employer, reducing the business's taxable income. The earnings in the account grow tax-deferred, and taxes are only paid upon distribution in retirement.
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4. Simplicity and Flexibility: SEP IRAs are favored for their ease of setup and administration, making them a popular choice for small businesses. Employers can decide each year whether and how much to contribute, which can be beneficial in years of varying profitability.

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Who Can Open a SEP IRA?

1. Small Business Owners: Any small business owner, regardless of the number of employees, can set up a SEP IRA. This includes sole proprietorships, partnerships, corporations, and non-profits.
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2. Self-Employed Individuals: Freelancers, independent contractors, and other self-employed individuals can open a SEP IRA. This option is particularly beneficial for those with higher incomes looking to save a substantial amount for retirement.
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3. Employers with Employees: If a business owner sets up a SEP IRA, they must also set up accounts for eligible employees and contribute an equal percentage of salary for each employee. Eligibility criteria usually include being at least 21 years old, having worked for the employer for at least three of the last five years, and receiving a minimum compensation (e.g., $650 in 2023).
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4. No Size Limit for Businesses: There’s no restriction on the size of the business for setting up a SEP IRA. Both very small businesses (even one-person companies) and larger businesses can establish a SEP IRA.

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A SEP IRA is particularly advantageous for those with higher self-employment income or small business owners who want to save substantially for retirement while also offering benefits to their employees. The plan's flexibility in contributions and ease of management make it suitable for many business scenarios. To find out if a SEP IRA is a good choice in your exact situation, be sure to speak to your trusted tax professional or CPA.