Imagine living the good life; being your own boss and business is good. But even after you retire, you still want the good life. Investing in a SEP IRA is one way you may be able to keep the good times rolling.
SEP stands for Simplified Employee Pension. It allows self-employed people to invest up to 25% of their adjusted wages in a SEPl IRA. It is great because you can invest far more money in good years than a regular traditional IRA (for 2022, the limit is $61,000), and in leaner years, you can feel free to invest less or even nothing. You also get a dollar-for-dollar tax deduction on your return.
Like other retirement plans, a SEP can be used to help lower your income tax liability. The due date for contributions is the same as for that year’s tax return. You can determine your tax liability before making any contributions and then decide what you want to contribute based on how much you owe.
Withdrawals from SEPs are treated just like traditional IRA distributions. As long as you leave the money in the account until retirement, it will grow tax-free. And you can invest in almost any type of stock, bond, or mutual fund you want. But because you receive an immediate tax benefit when you invest the money, the distributions are taxable. If the owner is not age 59 ½ at the time of the withdrawal, there will be a 10% penalty.
So if you are a self-employed individual with money to invest, consider investing in a SEP as part of your long-term plan.
Jennifer Thonert
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