Discover how SEP IRA works
A Simplified Employee Pension (SEP) IRA is designed specifically for self-employed individuals and small business owners, including those with employees. It allows employers to make tax-deductible contributions on behalf of eligible employees, including themselves.
The SEP IRA is valued for its simplicity and higher contribution limits, allowing contributions of up to 25% of each employee’s pay (up to $61,000 in 2021), making it an attractive option for business owners looking to maximize their retirement savings efficiently.
Required documents
To set up and maintain a SEP IRA, you will need:
- A formal written agreement to establish the SEP, using IRS Form 5305-SEP or a similar document provided by the financial institution.
- Records of employee eligibility and contributions.
- Annual disclosure statements to employees detailing their rights and benefits under the plan.
Benefits of SEP IRA for Business Owners
- High Contribution Limits: Offers one of the highest contribution limits of any retirement plan, enhancing your ability to save substantially for retirement.
- Flexibility: Contributions are not required annually, allowing business owners to adjust based on profitability and cash flow.
- Ease of Administration: SEP IRAs are simpler to administer than many other retirement plans, with no annual filings with the IRS required under most circumstances.
Important considerations
The SEP IRA is an excellent choice for those who seek a low-maintenance retirement solution with flexible contributions. However, all contributions are employer-funded, and consistency in contributions for all eligible employees is required by IRS rules.
Business owners should carefully consider their ability to make regular contributions in future years. It’s advisable to consult with a financial advisor to ensure that a SEP IRA aligns with your business’s financial situation and retirement goals.
For more information, please refer to the IRS publication on Simplified Employee Pension Plans.