SEP-IRA

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What to know about SEP-IRAs

A Simplified Employee Pension IRA (SEP-IRA) is a tax-advantaged retirement plan that allows employers to make contributions to their own and their employees' accounts. Contributions to a SEP-IRA are tax deductible for the business, and earnings grow tax-deferred.

A SEP-IRA provides the benefits of a company-sponsored retirement program without the administrative expenses, government reporting requirements, and complexity associated with many other types of retirement plans. These plans are designed for small businesses, including:

  • Self-employed individuals
  • Sole proprietors
  • Independent contractors
  • Partnerships
  • Small corporations, including S corporations

Contributions

Employees are not allowed to make contributions to a SEP-IRA. Employers may contribute up to 25% of compensation each year to each eligible employee's account. While employer contributions are not required, business owners who make contributions to their own accounts must make contributions of the same percentage of income to each eligible employee's account. Learn more about contribution limits on the IRS website.

Withdrawals

Employees may begin to take distributions from the plan as early as age 59½ and must begin taking distributions from the plan no later than April 1 following the year in which they reach age 73. Taxes are payable on distributions when they are withdrawn. In addition, the IRS may impose a 10% penalty on any distribution taken before the employee reaches age 59½, unless certain exceptions apply. Those exceptions include:

  • Medical expenses in excess of 7.5% of adjusted gross income
  • Health insurance premium payments if unemployed for 12 consecutive weeks
  • Qualifying higher-education expenses
  • Qualifying first-time home purchase ($10,000 lifetime limit)
  • Qualified birth or adoption ($5,000 limit per birth or adoption)
  • Substantially equal payments made over life expectancy
  • Qualified military reservist
  • Death
  • Disability

If you wish to establish a new plan using our mutual funds, please work with your financial advisor.

Any tax or legal information on this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Allspring Global Investments does not provide accounting, legal, or tax advice or investment recommendations.

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