What Is a SEP IRA?

Ajay Kumar, CPA, MBA

If you own a business and want to save for retirement, consider setting up a simplified employee pension individual retirement account. A SEP IRA can help both you and your employees set aside funds for the future. However, make sure your company and your long-term goals are a good match for this type of account.

There are several factors you’ll want to consider before opening a SEP IRA:

  • Contribution limits.
  • How to invest your SEP IRA.
  • Tax benefits.
  • Find out if a SEP IRA is a good fit.
  • How to open a SEP IRA.
  • Rules for providing SEP IRA contributions to employees.
  • The deadline for making contributions.

Here’s an overview of what to expect with a SEP IRA and how to open this type of account.

What Is a SEP IRA?

This type of retirement account is designed for small business owners. If you work for yourself or have several employees, you may be eligible for a SEP IRA. “Similar to a traditional IRA, SEPs are retirement accounts in which business owners can make tax-deductible contributions toward their retirement,” . The invested funds grow tax-free until they are withdrawn in retirement. When distributions are made, they are considered taxable income.

How to Open a SEP IRA

To start a SEP IRA, you’ll want to follow a number of steps. These include:

  1. Work with an advisor to help establish the account with a custodian.
  2. Create a formal agreement using IRS Form 5305-SEP.
  3. Provide information to employees who are eligible for the plan.
  4. Set up accounts for yourself and employees.
  5. Make contributions to the accounts.

SEP IRA Contribution Limits

An employer can contribute up to $58,000 or 25% of compensation to a SEP IRA in 2021, whichever is lower. Contributions can only be calculated on up to $290,000 of compensation. The contribution limits for a SEP IRA are significantly higher than the $6,000 to $7,000 limit for traditional and Roth IRA contributions.

SEP IRA Contribution Deadline

Typically, any funds you want to place in a SEP IRA will need to be contributed by the time your business files taxes for that year. This is generally April 15 of the following year. For instance, the deadline to contribute to a SEP IRA in 2021 would generally be April 15, 2022










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