SEP IRA: Retirement savings for the self-employed
What is a SEP IRA?A SIMPLIFIED Investment Account for Labor Employee Retirement IRA or SEP (Simplified Employee Pension Investment Retirement Account) is a retirement account that self-employed workers can create for themselves, or that small businesses can establish for the benefit of their employees. Using a SEP IRA can be advantageous for small businesses because it requires less effort and expense to commission a 401k plan. The way a SEP IRA operates is similar to a traditional IRA in which the owner can invest the funds and the amount of contributions can be deducted from taxes.
Opening a SEP IRA account
There are three main steps for opening a SEP-IRA. First, a formal written agreement must be drafted, which is usually done with a standardized model that the IRS offers. Second, eligible employees must be informed about the plan, usually by providing a copy of the model and, finally, the plan must be made available to each eligible employee. An eligible employee is defined as anyone over 21 who has worked for a company contributing to an IRA in three of the last five years, and has received payments of at least $ 500 during the most recent fiscal year. Costs of opening and managing a SEP-IRA are relatively low, and the IRS may grant loans to high costs of an account.
Distributions and contributions
Contributions and distributions (movement of money) to and from a SEP IRA are similar to those of a traditional IRA. Contributions from an independent individual to their own SEP IRA are tax deductible, as are contributions to IRAs of any employee. The law regulates the maximum amount of contributions to a SEP IRA. SEPIRA.com visit to learn about the current limits. The distributions of money from the accounts SEP-IRA are subject to traditional IRA rules, implying that previous withdrawals at age 59½ support tax penalties, and mandatory withdrawals are required from the age of 70½. In addition, withdrawals are subject to capital gains tax.