Author: Drew Osborne CFP®
Late winter and early spring are synonymous with tax season around our Windward offices. As we work with our clients to minimize their tax burden, retirement contributions can often be a good strategy to save for the future and also reduce their current tax liability. Today’s focus is on Simplified Employee Pensions (SEPs) or SEP IRAs.
Why SEP IRA’s?
- Easy to set up and administer
- The maximum contributions are generally higher than traditional IRA’s
- Deductible at all income ranges unlike traditional IRA’s
What is a SEP IRA and how does it work?
A SEP is a written arrangement that allows an employer to make contributions to a traditional IRA (SEP IRA) for each employee. SEPs can often be used by self-employed people because they have the same contribution limits as profit sharing plans but none of the complex and expensive compliance and report rules applicable to qualified retirement plans.
Any person with self-employment income is eligible for a SEP IRA. The maximum contribution allowed is 20% of net self employment income after the self employment tax deduction up to a maximum contribution of $53,000.
What are the benefits of a SEP IRA?
Contributions are tax deductible and tax deferred for the plan participant. Earnings on contributions are tax deferred until withdrawn. The maximum contributions are generally higher than traditional IRA’s, and SEP IRA contributions are deductible at all income ranges where traditional IRA deductibility is phased out for some taxpayers. SEP IRAs are easy to set up and maintain. There are no annual reporting requirements, and they do not require recurring contributions.
Our self-employed clients often feel like they pay substantial income taxes. They also know the importance of saving for the future, so the SEP IRA is a great way to take care of both. Make sure to consult with your tax and financial advisor to see if a SEP IRA could be a good fit for you.
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