SEP IRA Retirement Plan – Low Cost, Big Results
The SEP IRA retirement account is a strong choice for the self-employed worker, still offering many of the rewards enjoyed by the smaller businesses who use this plan. The contribution limits are generous . Since the self-employed do not receive wages, their limit on contributions is calculated based on net profits from the business undertaking. A self-employed person can contribute 20% of net profits up to a total of $44,000 per year. To calculate net profits, take the net self-employment income and subtract one half of the self-employment taxes; the resulting net-net self-employment income is then multiplied by 20% to arrive at the contribution amount. The contributions to a SEP IRA retirement account are deductible and willlower a taxpayer’s liability in the current year. SEP IRA retirement monies are taxed at ordinary income tax rates when qualified withdrawals are taken after the account owner is at least 59 ½. An early withdrawal will incur a 10% penalty on top of the regular tax responsibility . Self-employedpeople who set up a SEP on their own behalf may no longer contribute to the plan beginning the year they turn 70 ½ years of age. Usually, the SEP IRA retirement account must be set up and funded by the tax filing deadline, including extensions. In the small business design of the SEP , the employer makes the contributions on behalf of thequalified employees through a pre-tax salary reduction, and decides the contribution percentage which is applied uniformly to all eligible employees up to a cap of $49,000 per year or 25% of annual compensation, whichever is lower . A SEP IRA retirement account does not have the start up and workingcosts of a conventional account , and will allow for more generous contributions. The contributions are tax-deductible, and the company pays no taxes on earnings on the investments. The employer may even qualify for a tax credit of as much as $500 annually for each of the first three years for the costs of starting the account . Why not think about a SEP IRA retirement account ?
