SEP IRA Retirement Plan – Wealth 101
The SEP IRA retirement account is a sound choice for the self-employed worker, still providing a lot of of the benefits enjoyed by the smaller companies who use this plan. The contribution limits are higher . Because the self-employed do not receive wages, their limit on contributions is calculated based on net profits from the business enterprise. A self-employed person can contribute 20% of net profits up to a total of $44,000 per year. To figure 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 plan are deductible and willdecrease a taxpayer’s liability in the current year. SEP IRA retirement funds are taxed at ordinary income tax rates when qualified withdrawals are taken after the account owner is at least 59 ½. An early distribution will incur a 10% penalty in addition to the regular tax obligation . Self-employedindividuals who establish a SEP on their own behalf may no longer contribute to the plan starting the year they turn 70 ½ years old. Usually, the SEP IRA retirement account must be set up and funded by the tax filing deadline, including extensions. In the small company model of the SEP , the employer makes the contributions on behalf of thequalified employees through a pre-tax salary reduction, and determines the contribution percentage which is applied equally to all eligible employees up to a limit of $49,000 per year or 25% of annual compensation, whichever is less . A SEP IRA retirement account does not have the start up and operatingexpenses of a standard account , and allows for much larger contributions. The contributions are tax-deductible, and the company pays no taxes on earnings on the investments. The employer might 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 plan . Why not consider a SEP IRA retirement plan ?
