Understanding SEP-IRAs
SEP-IRAs, which are treated the same as regular IRAs, are used by business owners to offer their employees retirement benefits. Funds may be invested in the same way as other IRAs. For self-employed individuals, there is no large administration charge. However, if the self-employed individual has employees, the same benefits must be offered to them. IRS Pub 560 provides full details about SEP products. The establishment and contribution deadline is the same as the employer's filing deadline for tax returns or extensions. While eligibility may come with restrictions, they must not exceed the following:
- Must be at least 21 years old.
- Received $500 or less in compensation during the tax year.
- Has worked for the employer for three years or more during the past five
years.
When qualified withdrawals are made after the age of 59½, regular tax rates are used for SEP-IRA funds. Contributions are deductible, and they are a good way to lessen individuals' income tax liabilities. However, it is important to keep contribution limits in mind.
Contribution Limits
Contributions to SEP-IRAs are treated as parts of profit-sharing plans.
Employers may make contributions to employees' accounts that equal up to 25
percent of their wages. For example, if a worker brings in $100,000 in one
year, the employer could contribute up to $25,000. Contributions should not
exceed this percentage or the annual contribution limit, which is a specific
dollar amount. Since this amount may change each year, it is best to discuss
the current limit amount with an agent. Employers may make contributions until
the date when their annual return is due.
Self-Employment Considerations
Contribution limits for self-employed individuals are more complex. The
percentage is less than the amount for those who work for someone else.
Computation formulas for this number can be found in IRS Pub 560. It is best
for self-employed individuals to discuss the current percentage and
contribution options with an agent. There are two specific issues affecting
self-employed contributors, which are reduced rates and the FICA tax.
1. Reduced Rate
The limit of 25 percent for workers contributions applies to wages. However, it
does not apply to net profit. If a business is set up as a sole proprietorship,
the owner pays his or her own wages. He or she may also contribute up to 25
percent of wages, which is equal to the profits minus the contribution to the
SEP. The CR reduction results in a 20 percent contribution rate.
2. FICA Tax
Contribution limits are computed from net profit adjusted with the
self-employment tax deduction. The adjusted net profit amount is slightly
higher than the net earnings. To learn how this amount is computed, discuss the
process with an agent.
In summary, 20 percent of 92.9 percent of net profit is the overall contribution limit. Keep in mind that proposed deductions for contributions are included in net earnings.
For more information, feel free to Contact Neptune Financial to schedule an appointment.
Basic Understanding
This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings.
An individual seeking information regarding their investment or retirement needs should contact a financial professional.
Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.
