The Simplified Employee Pension (SEP) IRA is a type of retirement account used by those who own businesses. The account allows for the owner to contribute to his own account as well as accounts for the business’ employees. Contributions can be made by the employer to a maximum of 25% of the employee’s salary. The contributions made to the accounts in a SEP IRA must be in equal percentages for all qualifying employees. A self-employed individual can contribute up to 20% of their net earnings (Schedule C). The contribution limit for 2022 is 25% up to $61,000. For 2023, the contribution limit rose to 25% or up to $66,000.
Check out this video for an understanding of how you can use SEP IRAs to your advantage
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Employee Participation Requirements
An individual can open and make contributions to a SEP IRA if the following requirements are met:
Reached age 21
Worked for employer for at least 3 years
Received at least $750 in compensation
A SEP follows the same rules as a Traditional IRA. A SEP IRA distribution is taxed as ordinary income the tax year of the distribution.
Required minimum distributions must be taken each year beginning with the year you turn age 72 (70 ½ if you turn 70 ½ in 2019).
Answers to some of the most frequently asked investing questions (FAQs) about SEP IRAs
What is a SEP IRA?
“A SEP IRA is a retirement plan established by employers and self-employed people, where employers may make tax-deductible contributions on behalf of eligible employees.”
What does SEP stand for?
“Simplified Employee Pension.”
What is the SEP IRA maximum contribution?
“For 2022, the contributions are limited to 25% of your net earnings from self-employment up to $61,000 For 2023, this limit rose to 25% of your net earnings from self-employment up to $66,000. ”
How does a SEP IRA work?
“SEP-IRA accounts work like traditional IRAs and provide small business owners with an easy way to contribute toward their employees’ retirement as well as their own.”
Can an employee contribute to a SEP IRA?
“Typically, no. Only the employer can contribute to a SEP IRA.”
Who can contribute to a SEP IRA?
“Only the employer can contribute to a SEP IRA.”
Do you have to contribute to your employees SEP IRA?
“No, you do not have to contribute to your employees’ SEP IRAs, but in the years you do contribute, contributions must be made to all eligible employees.”
Does a SEP IRA have an age limit?
“No, there is no age limit for a SEP IRA as long as plan’s requirements. Additionally, SEP contributions can be made even if you are age 72 or older.”
Is a SEP IRA a Traditional IRA?
“A SEP IRA is a type of traditional IRA. Contributions are tax-deductible, the investments grow tax-deferred until distribution, and distributions are taxable.”
Can I buy real estate with a SEP IRA?
“Buying real estate with an IRA or a solo 401k certainly can be done! You just need to find a custodian that will hold non-traditional or ‘alternative’ investments.”
Can I use a SEP IRA to buy a house?
“You can use a SEP IRA to buy a house.”
How do I use a SEP IRA to buy a house?
“You first need to find a custodian that will hold non-traditional or ‘alternative’ investments and establish an IRA with them. You will then locate the house you want to purchase, and typically, your custodian will require you to sign some internal forms. After making sure the contract is in the name of the IRA, your custodian will purchase the property for you on behalf of your IRA.”
How do you set up a self-directed SEP IRA?
“You will first need to find the custodian you like! Once you have picked a good custodian, you will complete some paperwork (typically an application) and in a few days, your account will be open. *Processes will vary by custodian.”
What is the difference between a SEP IRA and SIMPLE IRA?
“Both are employer plans, but a SEP-IRA only allows business owners to make contributions for both themselves and their employees, whereas a SIMPLE IRA allows both the employee and the employer to make contributions.”
DISCLAIMER: Quest Trust Company does not render tax, legal, accounting, investment, or other professional advice. If tax, legal, accounting, investment, or other similar expert assistance is required, the services of a competent professional should be sought.