SEP IRA’s are simplified employee pensions, but with a much higher contribution limit.. and find out what that means from the expert David Moore in this months IRA Blogcast video!

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When it comes to retirement planning, many people rely on traditional IRA and 401(k) plans. However, an increasingly popular option for many is the Self-Directed IRA. Within this category is the SEP IRA, or Simplified Employee Pension IRA.

So, what is a SEP IRA, and how does it work? In simple terms, a SEP IRA is a retirement savings plan for self-employed individuals or small business owners. It allows employers to make retirement contributions for themselves and their employees.

One significant advantage of the SEP IRA is the contribution limits. In 2021, an employer can contribute up to 25% of an employee’s salary or $58,000 (whichever is less). For the self-employed, the contribution limit is 25% of net income. This higher limit can help maximize retirement savings and potentially reduce taxable income.

Another significant benefit is the simplicity of the plan. Compared to other retirement plans, the SEP IRA has fewer administrative responsibilities and paperwork. There are no annual filings required, making it an attractive option for small businesses with limited resources.

In addition to these advantages, SEP IRAs offer tax benefits. Contributions to the plan are tax-deductible for the employer, reducing taxable income. Also, the earnings on the account can grow tax-deferred until withdrawals begin in retirement.

However, there are some limitations to consider. SEP IRA contributions must be proportional for all employees, so higher contributions for the employer may result in higher contributions for all employees, including part-time or seasonal workers. Also, once established, a SEP IRA cannot be converted into a Roth IRA or rolled into another retirement account.

In conclusion, a SEP IRA can be an excellent choice for small business owners or self-employed individuals looking to maximize their retirement savings while minimizing administrative responsibilities. However, as with any financial decision, it’s essential to thoroughly research and weigh the pros and cons before selecting a retirement plan.