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A SEP-IRA, or Simplified Employee Pension IRA, is a tax-deferred retirement plan provided by sole proprietors or small businesses, most of which do not have any other retirement plan. Contributions are made by the employer, up to about 13% (15% if the business is a regular C corporation) of each employee’s total compensation, with a maximum contribution of about $24,000 (which may vary in future years). With the exception of the higher contribution limits, they are subject to the same rules as a regular IRA. In a SEP-IRA, contributions and the investment earnings can grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income. Why We Like It Can Also Invest in IRAs Employees with SEP-IRAs can also invest in Roth or regular IRAs (though deductibility depends on income level). Tax-deferred Contributions and Earnings Employer contributions are made pre-tax, and the contributions and earnings can grow tax-deferred until they are withdrawn. Tax-deferred contributions and earnings make up the best one-two punch in investing. Employer Contributions Only employers can contribute to SEP-IRAs. While this means you have less control over the amount contributed, if you have a generous employer looking to expand your overall benefits package, this can be the beginning of a nice nest egg for your retirement. Besides, employer contributions to a SEP-IRA do not preclude you from investing in an IRA on your own. Who Is Eligible Depending on your company’s rules, you may be eligible in any year you earn a salary and are a regular employee. |
