A Simplified Employee Pension Individual Retirement Account (SEP-IRA) is a written plan that allows small business owners a simplified method to make contributions to their employees’ retirement or their own if they are self-employed. This type of retirement plan allows contributions to grow tax-deferred.
Generally, the employer can deduct their contributions made to the SEP-IRAs. Employees have the option to make IRA contributions up to the maximum limit to the same account if the plan allows. The amount contributed to the IRA by the employee that can be deducted may be limited due to their participation in the SEP-IRA.
Eligibility
Generally, the employer must cover all employees over age 21 that meet a minimum income requirement and have worked at the company during any three of the preceding five years.
Tax Features
Generally, contributions are deductible by the employer.
The employee can make Traditional IRA contributions to their own account up to the maximum limits.
SEP-IRA contributions grow tax-deferred.
Contribution Details
The employer’s contribution to the account may not exceed the lesser of 25% of the employee’s compensation (less than 20% of net earnings for self-employed individual making a contribution to their own account) or $69,000 for 2024 ($66,000 for 2023).
An employee who is part of the plan may also make annual IRA contributions up to $7,000 for 2024 and $6,500 for 2023 (or 100% of earned income, whichever is less) if the plan allows. An individual who has reached the age of 50 on or before December 31 of the year for which the contribution is made may make an additional “catch-up” contribution of $1,000 for tax years 2024 and 2023.
SEP plan participants who continue employment after attaining age 73 continue to receive employer contribution, even though they are also required to take RMDs from the IRA.
Employers must contribute to the SEP-IRA by the due date of their return including extensions. Individuals may contribute to a SEP-IRA for a specific tax year starting on January 1st of that year. The deadline to make a contribution is the due date of the individual's return excluding extensions (usually April 15th of the following year).
Investment Minimums
The minimum investment to open a SEP-IRA at Davis is $1,000.
Making Distributions
An individual may withdraw their assets from a SEP-IRA at any time. However, the distribution may result in a 10% early withdrawal penalty and may be taxed as current income if the money is removed prior to the age of 59 ½. There are no penalties on withdrawals after age 59 ½. The tax-deductible contributions in your account will also be taxable at your current rate when assets are withdrawn. Any SEP-IRA contributions that were not tax-deductible at the time of the contribution should not be taxable when withdrawn from the IRA account. If you need to remove assets from the SEP-IRA prior to 59 ½, check to see if any of the exceptions to the penalty apply. The following examples are exceptions to the 10% early withdrawal penalty but are not limited to:
- Distributions due to disability
- Distributions for first time homebuyer up to a $10,000 lifetime limit
Required Minimum Distributions
Assets can not be kept in a SEP-IRA indefinitely. The assets that need to be withdrawn each year are called Required Minimum Distributions (RMD). The SECURE Act 2.0 of 2022 changed the age from 72 to 73 and applies to individuals who reach age 72 after December 31, 2022. The first RMD must be distributed by April 1st following the calendar year you attain RMD age. Failing to take the minimum distribution will result in a 25% excise tax on the amount that should have been withdrawn. If corrected in a timely manner, the excise tax will be reduced to 10%. The RMD will still need to be withdrawn and income taxes paid on the distribution.
Additional Information
Please consult your tax advisor before establishing this type of account.
Please review the Traditional IRA Disclosure Statement and Custodial Agreement for complete SEP-IRA account details including fees.