Posted by Key Tax & Financial Services, LLC

Everything you need to know about SEP IRA

Everything you need to know about SEP IRA

What Is a SEP IRA? 

A Simplified Employee Pension (SEP) IRA permits independently employed individuals or entrepreneurs set aside up to $56,000 per year toward retirement. 

A SEP IRA looks like a mess of letters, and spelling it out doesn't help: The initial segment represents simplified employee pension; the second for an individual retirement account. 

Interpretation: It's a retirement account for entrepreneurs and independently employed individuals. 

Whom is a SEP IRA best for? 

The "simplified" piece is no falsehood: A SEP IRA is a primary retirement account, much like a conventional IRA. SEP IRA commitments are tax-deductible, and speculations develop tax-conceded until retirement when distributions are taxed as salary. 

The highest thought for a SEP IRA is that on the off chance that you have employees whom the IRS thinks about qualified members in your arrangement, you should contribute for their benefit, and those commitments must be an equivalent level of remuneration to your own. Eligible members are employees who are 21 or older, have worked for you for three of the previous five years and have earned in any event $600 from you in the last year. 

For instance, if an employee worked for you in 2016, 2017 and 2018, you would need to make a commitment for that person for the 2019 arrangement year. If you need to bury 15% of your pay for yourself, you should likewise contribute 15% of that employee's remuneration to his or her arrangement. Employees claim and control their accounts. 

As a result of that standard requiring parallel commitments as a level of remuneration, a SEP IRA is commonly best for independently employed individuals or entrepreneurs with few or no employees. 

What are the SEP IRA commitment limits? 

This is the place the SEP IRA stands separated from a conventional IRA. A regular IRA enables you to secure $6,000 in 2019 or $7,000 in case you're fifty years and above (up from $5,500 and $6,500 in 2018). With a SEP IRA, you could store about multiple times that sum. 

There's a lot of fine print, however; we'd anticipate nothing less from our companions at the IRS. SEP IRA yearly commitment limits can't surpass the lesser of: 

  • 25% of remuneration 
  • $56k in 2019 (up from $55k in 2018) 

As far as possible, 25% of pay, is additionally the utmost for the amount you can contribute for each qualified employee. The measure of salary you can use to figure as far as possible is likewise constrained to $280k in 2019 (up from $275k in 2018). There is no trick up commitment recompense at age 50 for SEP IRAs. 

You can consolidate a SEP IRA with a conventional or Roth IRA. In case you're an employee who is secured by a SEP IRA, business commitments don't lessen the sum you can add to an IRA for yourself. However, the measure of your conventional IRA commitment that you can deduct might be decreased at certain higher salary levels, because of the blend of the two plans. 

What are the upsides and downsides of a SEP IRA? 

We've laid out vast numbers of these above, yet to hit the features quickly: 


1. High commitment cap of up to $56,000 in 2019 

2. Simple to set up and control 

3. Can be joined with a conventional IRA or a Roth IRA 

4. Commitments are tax-deductible, including those made to employee accounts. You can deduct the lesser of your obligations or 25% of remuneration, subject to the $280,000 pay top. In case you're independently employed, your deduction is 25% of net independent work income. 

5. Adaptability: You don't need to focus on contributing each year 


1. There is no catch-up commitment for savers who are 50 and above

2. No Roth form, which implies you can't decide to pay tax on your commitments now and take distributions without tax in retirement, as you can by opting for a Roth IRA 

3. Required relative commitments for each qualified employee if you contribute for yourself 

4. Like conventional IRAs and 401(k)s, SEP IRAs require least distributions starting at age 70½ 

5. Likewise like a conventional IRA, distributions before age 59½ are taxed as earnings and subject to a 10% punishment, except if the purpose behind the appropriation fulfills one of the early withdrawal individual cases 

How would I open a SEP IRA? 

Opening a SEP IRA is like opening a conventional or Roth IRA. However, there are some extra administrative work and revealing necessities, particularly on the off chance that you have employees. Most IRA account suppliers additionally offer SEP IRAs, and you can open the account on the web. 

The IRS laid out three stages for setting up your SEP IRA: 

1. Make a formal composed agreement. You can make this happen using the IRS Form 5305-SEP or through your account supplier. 

2. Give qualified employees data about the SEP IRA. You can give them a duplicate of IRS Form 5305-SEP or get comparable data through your account supplier. 

3. Set up discrete SEP IRAs for each qualified employee with the account supplier.

Key Tax & Financial Services, LLC