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Sep Ira

The term SEP IRA refers to a Simplified Employee Pension Individual Retirement Account. SEP IRAs are often used by self-employed individuals or small business where the employer and the employee(s) will all benefit from the same type of retirement plan. As an IRA the SEP IRA can include all the same types of investments including mutual funds, stocks and bonds and other types of low, medium and high risk investments. Contributions to a SEP IRA by an employer are tax deductable however taxes will be taken at time of withdrawal. For those employers and employees accessing the SEP IRA before the age of 59 ﾽ years there will be the average tax deduction plus a penalty, however this is avoided if the account is not accessed until after the individual turns 59 ﾽ years of age. Generally as a type of profit sharing plan which offers tax deductions for contributions, the business or employer is limited to contributing 25% of the employee's wages. Self-employed individuals may contribute just over 18% to their own SEP IRA, however the total income is calculated not on net profit but on this amount less the deduction for self-employment taxed amount. As this can be complex, working with a financial advisor or CPA is highly recommended for a self-employed individual.

Fast Facts

  • SEP IRA plans are the most common form of retirement savings for small businesses and the self employed.
  • Contributions to a SEP IRA can vary every year from 0% up to 25% of income as calculated based on employment status.

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