Simple Employee Pension (SEP-IRA) accounts provide a great way for self-employed individuals to save money for retirement. However, you need to be aware of the contribution limits and adhere to them. You also need to stick to certain deadlines.
Basics of SEP-IRA Accounts
A SEP-IRA account gives business owners a way to save money for retirement for themselves and their employees. Self-employed individuals and businesses of all sizes can set up this type of plan. Business owners can invest money for each employee. It is a relatively simple account that you can manage with minimal paperwork. There are no annual filing requirements.
Contribution Limits for SEP-IRA Accounts
One of the nicest features of a SEP plan is the significant amount you can set aside for retirement. All contributions to a SEP-IRA account are considered to be made by employers on behalf of their employees. You can contribute up to 25% of an employee’s compensation or $61,000 in 2022, whichever is less. For 2023, the allowable contribution limit for a SEP-IRA is 25% of compensation or $66,000.
Adjusted Net Self-Employment Income
Self-employed individuals must use their adjusted net self-employment income as their compensation when calculating the allowable contribution limit of 25% to their SEP-IRA. First, determine your gross income. Then subtract your business expenses, including what you contributed to your SEP-IRA. Then subtract half of your self-employment tax. This is your adjusted net income.
Contribution Deadlines
Like traditional bank accounts, SEP-IRA accounts provide last-minute tax savings to reduce your tax bill as a business owner, but you must adhere to certain deadlines. A SEP-IRA account must be established by your business’s tax filing deadline, including any extensions, for the tax year to which the qualified contribution applies.
Putting SEP-IRA Limits in Context
There are other retirement plan options for small businesses and self-employed individuals, such as SIMPLE IRAs, individual 401(k) plans, Keoghs, or traditional 401(k) plans. It makes sense to compare these options and decide on the most suitable choice for your needs.
Frequently Asked Questions (FAQs)
Can part-time employees invest in a SEP-IRA? You can invest in a SEP-IRA as long as you are over the age of 21, have worked for the company for three years of the past five years, and earned at least $650 with the company in the last year.
Where can I report contributions to my SEP-IRA on Form 1040? You can report contributions you make to your SEP-IRA on line 16 of Schedule 1 if you are self-employed. The total is then transferred from part two of Schedule 1 to line 10 of your Form 1040. You must report contributions made concerning the tax year in which the SEP account was established.
Source: https://www.thebalancemoney.com/sep-ira-contribution-limits-and-deadlines-3859079
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