SEP IRA
What Is a SEP IRA?
A SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) is a retirement plan designed for self-employed individuals and small business owners. Employers contribute directly to retirement accounts for themselves and their employees.
The plan allows businesses to make tax-deductible contributions to employee retirement accounts.
Why It Matters
SEP IRAs provide an easy-to-administer retirement savings option for small businesses. Contribution limits can be higher than many other retirement accounts, allowing business owners to build retirement savings efficiently.
The plan is particularly popular among freelancers and self-employed professionals.
How a SEP IRA Works
Employers establish SEP IRAs for eligible employees and make contributions on their behalf.
Typical features include:
- employer-only contributions
- tax-deductible contributions for the business
- tax-deferred investment growth
- flexible contribution amounts each year
Each employee owns and controls their individual account.
SEP IRA vs Solo 401(k)
- A SEP IRA allows only employer contributions.
- A Solo 401(k) allows both employer and employee contributions.
FAQs About SEP IRAs
Who can establish a SEP IRA?
Self-employed individuals and small businesses.
Are employees required to contribute?
No, contributions are made by the employer.
Are contributions taxed immediately?
No, taxes are deferred until withdrawals occur.
Related Terms
