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Simplified Employee Pension Individual Retirement Account, or SEP-IRA (pronounced Sep-I-R-A) for short. A SEP-IRA is a retirement plan for business owners and their employees, and it’s a dream come true.
The benefits of a SEP-IRA:
- Contributions are tax-deductible — meaning they’ll lower your taxable income in the current year
- The annual contribution limit is the lesser of 25% of your income, or $49,000 — MUCH higher than the $5,000 limit of a traditional IRA or Roth IRA
- Funds can be invested the same way as any other IRA
- Contributions and earnings can be rolled over tax-free to other IRAs and retirement plans
- It has no associated fees if you don’t have any employees, and minimal fees if you do
Of course it’s not exactly that simple. A few crucial details:
- The annual contribution limit of 25% is constrained to the first $245,000 of income
- Your contribution to a SEP-IRA is tax deductible, and will therefore reduce your contribution limit by whatever you contribute
- The calculation of the actual contribution limit for a self-employed contributor is based on net profit minus one-half self-employment tax minus the contribution for him or herself
Read more about a SEP-IRA on the IRS website and at Investopedia.
Note: Make sure you talk to an accountant or tax planner to understand the full implications of the contribution.
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