Simplified Employee Pension (SEP)
Definition of 'Simplified Employee Pension (SEP)'
To set up a SEP, an employer must contribute to a SEP-IRA for each employee who is eligible to participate. The amount of the contribution is based on a percentage of the employee's salary, up to a maximum of 25% of the employee's compensation. The employer can also make a "catch-up" contribution of an additional 25% of the employee's compensation for employees who are age 50 or older.
SEP-IRA contributions are tax-deductible for the employer, and they are also tax-free for the employee until they are withdrawn. SEP-IRAs are subject to the same rules as traditional IRAs, with some exceptions. For example, SEP-IRAs do not have required minimum distributions (RMDs).
SEPs are a great way for small businesses to provide their employees with a retirement savings plan. They are easy to set up and administer, and they offer significant tax advantages. If you are a small business owner, you should consider setting up a SEP for your employees.
Here are some additional details about SEPs:
* SEPs are funded with pre-tax dollars, which means that the employer's contributions are deducted from their taxable income.
* SEP-IRAs are subject to the same contribution limits as traditional IRAs. For 2023, the maximum contribution is $27,000 ($33,500 for employees who are age 50 or older).
* SEP-IRAs are also subject to the same annual income limits as traditional IRAs. For 2023, the maximum contribution is phased out for single taxpayers with modified adjusted gross income (MAGI) between $144,000 and $214,000 and for married taxpayers filing jointly with MAGI between $214,000 and $428,000.
* SEP-IRAs are subject to the same required minimum distribution (RMD) rules as traditional IRAs. For 2023, the RMD is 59 1/2 years old.
If you are considering setting up a SEP for your employees, it is important to speak with a financial advisor to make sure that it is the right choice for your business.
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