The Simplified Employee Pension Individual Retirement Account, SEP-IRA for short, is a retirement savings account that allows self-employed individuals and employees of small businesses to make contributions. If you work for yourself, you may contribute to your own retirement account and employee retirement accounts. Employers who have sole proprietors, corporations, partnerships, and LLCs with no employees other than the business owner can also make contributions to a SEP-IRA.
Self-employed individuals and employees of small businesses with up to 25 employees are eligible to participate in a SEP IRA. The amount you can contribute each year to your SEP IRA depends on your age and income. For 2015, the maximum contribution is $53,000 or 25% of your compensation, whichever is less. If you're over 50 years old, you can contribute $59,000 or $6,000 more than the maximum contribution for those under 50. You must also ensure that all compensation and contributions to SEP IRAs do not exceed 100% of your salary. Any salary reduction contributions made on your behalf by your employer will be considered part of your compensation. SEP IRA account holders can begin withdrawing funds without penalty at the age of 59 1/2. However, you must start taking required minimum distributions from your SEP IRA at 70 1/2 years old whether you're still working or not. You can also take out more money if you need it, but you'll have to pay income taxes on the withdrawal. A SEP IRA allows small business owners to contribute a significant amount to their retirement savings while reducing paperwork and administrative costs. However, you must work for the company that sponsors your SEP-IRA account in order to make contributions. In addition, if you receive any employee contributions from your employer, they will be considered part of your compensation. Contributions to a SEP IRA are tax-deductible and distributions are taxed as regular income. The account holder can start withdrawing funds without penalty at the age of 59 1/2 but must start taking required minimum distributions at 70 1/2.Who's Eligible?
SEP IRA Contribution Rules and Limits
Withdrawal Limits
The Bottom Line
Simplified Employee Pension Individual Retirement Account (SEP IRA) FAQs
The SEP-IRA limit for 2015 is $53,000 or 25% of your compensation, whichever is less.
Compensation includes wages, salaries, commissions and any other amounts you receive for providing services. It also includes net income from self-employment, minus the amount of your deduction for SEP contributions.
Yes. If you're over 50 years old, you can contribute up to $59,000 or $6,000 more than the maximum contribution for those under 50.
SEP IRA contributions are deductible on your income tax return. Your employer is not required to make any matching or nonelective contributions on your behalf.
SEP IRA account holders can begin withdrawing funds without penalty at the age of 59 1/2.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
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