Warning
Info
Warning
Info
Simple English definitions for legal terms
SEP-IRA
Read a random definition: copyright misuse
A quick definition of SEP-IRA:
A SEP-IRA is a type of retirement account that employers can set up for their employees. It allows employers to contribute money to the account, which is tax-deductible and has low maintenance costs. The employer can choose to limit contributions when business is bad, but they must contribute the same amount for all employees. The annual contribution limit is high, up to 25% of employee wages or $58,000 in 2021.
A more thorough explanation:
SEP-IRA stands for simplified employee pension individual retirement account. It is a type of IRA plan that allows employers to contribute to their employees' retirement savings while also receiving tax benefits.
- Employers can establish and contribute to a SEP-IRA
- Employers have the flexibility to limit contributions when business is bad
- Employer contributions are tax-deductible
- Annual contribution limits are higher than other IRAs
- Employees cannot contribute to a SEP-IRA
Let's say that John owns a small business and wants to provide retirement benefits to his employees. He decides to establish a SEP-IRA plan and contributes 10% of each employee's salary to their SEP-IRA account. If an employee earns $50,000 per year, John would contribute $5,000 to their SEP-IRA account. The contributions are tax-deductible for John, and the employees can benefit from the tax-deferred growth of their retirement savings.
Another example is if an employee earns $100,000 per year, the employer can contribute up to $25,000 (25% of the employee's salary) to their SEP-IRA account. This allows for higher contribution limits than other IRA plans, making it a popular choice for small business owners.
These examples illustrate how SEP-IRA works and how it can benefit both employers and employees in saving for retirement.