SEP IRA stands for Simplified Employee Pension Individual Retirement Arrangement and this is a variation of the Individual Retirement Account used in the US. These are adopted by business owners to provide retirement benefits for the business owners and their employees. If a self employed person has employees, each must receive the same benefits, though there are no significant administration costs for the self employed person who does not have any employees. A SEP account is treated just like an IRA, so funds can be invested in the same ways as any other type of IRA.
There are a few eligibility conditions in place, but these are loose, so the employer can choose to be less strict than the guidelines suggest. For example, it is suggested the employer not provide a SEP account to employees who are under the age of 21, however if they decide to allow contributions from employees younger than this cutoff, they have that option. In addition, it is suggested that the employee have worked for the company for at least three of the last five years, however, if the employer would like to offer the benefit to newer employees, they have that option, as well. Lastly, any employee who has received at least $500 in compensation for the last tax year must be eligible for the company’s SEP IRA plan. You can go to the this gold ira rollover review to inquire regarding your retirement plan.
SEP IRA funds are taxed at ordinary income tax rates when qualified withdrawals are taken after the age of 59.5, which is the same rule that applies to traditional IRAs. Contributions to a SEP plan are deductible and will lower a taxpayer’s income tax liability in the current year. Contributions to these plans are treated as part of a profit sharing plan and employers may contribute up to 25% of the employee’s wages into the SEP IRA account. The total contribution to the SEP IRA account should not be greater than the lesser of 25% of income or $49,000. This has been the maximum contribution for the last several years and the compensation used in the calculation is capped at $245,000. For example, an employer making a 10% contribution cannot contribute more than $24,500 for any single employee.
In the case of self employment, the contribution limit is a bit more complicated, but barring limits, is approximately 18.6% of net profits.
Due to the complicated nature of SEP IRA accounts, it is best to consult a professional.