SEP IRA

 

What is a SEP IRA?

A Simplified Employee Pension (SEP) plan allows employers to contribute to IRAs for themselves and their employees. A business of any size can establish a SEP. A SEP has minimal start-up and operating costs compared to a 401(k) plan but requires employers to contribute the same percentage for owners and all eligible employees..

 

TL;DR –A SEP IRA is an employer-sponsored plan that allows employers to make contributions.

 

Eligibility

Employees must meet the following requirements:

  • Age 21 or older

  • Has worked for the employer for 3 of the last 5 years

  • Received at least $650 in compensation from the employer during the year

Contribution Limits

Cannot exceed the lesser of:

  • 25% of employee’s compensation for the year

  • $58K for 2021

Withdrawals

  • 59½ and under: Taxes and 10% penalty

  • 59½ to 72: Taxes and no withdrawal penalty

  • 72 & over: Taxes applyand distributions are required by law (called required minimum distributions or RMDs)

Taxes

  • Contributions are made with pre-tax dollars, meaning the amount can be deducted from your taxable income

  • Money grows tax-deferred; however, withdrawals will be taxed as ordinary income.

 
Edward Oh