A Simplified Employee Pension IRA, or SEP IRA, is a type of individual retirement account (IRA) that is designed for small business owners and self-employed individuals to make tax-deductible contributions to their own retirement accounts and the retirement accounts of their employees.
With a SEP IRA, the employer contributes to each eligible employee’s IRA on their behalf, up to a certain percentage of their income (up to 25% of compensation or a maximum of $58,000 in 2021). The employer contributions are tax-deductible for the business, and the contributions grow tax-deferred until they are withdrawn in retirement.
SEP IRAs are relatively easy to set up and administer, with no annual filings required, and employers have flexibility in deciding how much to contribute each year (as long as it is within the IRS limits) and which employees to cover. Employees have full control over their SEP IRA accounts and can make investment decisions based on their own risk tolerance and investment goals.
One potential drawback of SEP IRAs is that, unlike traditional and Roth IRAs, employees are required to take required minimum distributions (RMDs) once they reach age 72. However, this is a common requirement for most employer-sponsored retirement plans. Overall, SEP IRAs can be a valuable retirement savings option for small business owners and their employees.
