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Business owners can make tax-deductible contributions into a SEP IRA.
The SEP IRA is easy to set up and has far less administrative tasks than a 401(k) or 403(b). Also, there is no Form 5500 filing requirement with the SEP IRA.
If you have W-2 employees, you are required to make contributions for them as well. For example, if the employer contributes 10% of their earnings into a SEP IRA as an employer contribution, the employer must contribute 10% of the salary to the SEP IRA for each W-2 employee.
The employer has the flexibility to change the company contributions on a yearly basis.
If you are self-employed or a small business owner, can contribute at any age.
SEP IRA contributions are 100% vested upon the contribution.
2022: The maximum contribution in a SEP IRA is up to 25% of your compensation or $61,000, whichever is less. If you have employees, you are required to make employer contributions for them as well. Retirement Plans FAQs regarding SEPs | Internal Revenue Service (irs.gov)
If you are self-employed and file your federal taxes on form Schedule C, your SEP IRA contribution is 100% tax deductible.
Business owners can also deduct contributions for themselves and employees against their federal taxable income.
Tax-deductible contributions and earnings are taxed as ordinary income for distributions after the age of 59 ½ years old.
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The 10% IRS penalty applies on withdrawals if the distribution is before age 59½ unless an exception below applies. You can read more about this in detail in our Tax Planning section.