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How SEP IRA Contributions Can Provide Tax Relief

SEP IRA contributions offer a convenient way to save for retirement while providing tax relief and other benefits. Learn more about SEP IRAs and let your Oakwell team help you determine if this is the right retirement vehicle for you.

What is a SEP IRA?

A SEP IRA is a Simplified Employee Pension plan that allows employers to contribute to individual retirement accounts set up for themselves and their employees. This type of plan can be appropriate for businesses of any size, including self-employed individuals with few or no additional employees.

What are the benefits of a SEP IRA?

Conventional retirement plans can come with substantial start-up and operating costs. SEP plans can provide a significant source of retirement savings with low administrative costs, high contribution limits, and tax benefits. They are also easy to set up and operate and have flexible annual contributions, which can be helpful if your cash flow is inconsistent or unpredictable.

According to the IRS, contributions an employer can make to an employee’s SEP-IRA cannot exceed the lesser of:

  •  25% of each employee’s compensation, or
  • $58,000 for 2021 or $61,000 for 2022

It is important to note that SEP IRAs are employer-sponsored plans. This means contributions come directly from you as an employer and must be equal for all eligible employees. In addition, the IRS does not permit elective salary deferrals or catch-up contributions in SEP plans.

Who can benefit the most from a SEP IRA?

SEP plans are best suited for the following types of businesses:

  • Self-employed individuals with 0-2 employees
  • Single-member LLCs
  • Sole proprietorships
  • Consultants or contractors

In other words, if you have a small or one-person business with a good income and are willing to make retirement contributions that help with tax relief, a SEP IRA could be right for you. SEP IRAs can become more expensive with larger companies because as an employer-sponsored plan, whatever you contribute to your own IRA, you also need to match for your employees.

When should I set up a SEP IRA?

It is best to set up your SEP IRA before filing taxes for the most recent tax year. If you have not filed your 2021 taxes yet, consider establishing and contributing to a SEP plan before filing. Your SEP plan can reduce your taxable income and compound tax-deferred interest, providing tax relief that could be critical for small business owners and self-employed individuals.

What if I already filed my taxes for this past year?

If you have already filed your taxes this season, you may be able to file an amended tax return. However, since the new year has begun, you can also begin making SEP IRA contributions for the current tax year and beyond.

How do I set up a SEP IRA?

Setting up a SEP IRA is generally straightforward. The IRA outlines clear set-up steps for a SEP plan. However, it is necessary to ensure that this is the right retirement vehicle for you. To that end, confer with your wealth manager to review your potential tax savings with a SEP IRA.

The Oakwell Private Wealth Management team can help you determine whether a SEP IRA, profit-sharing plan, or 401(k) would be the most efficient retirement vehicle for your situation. In addition, our experienced professionals will spend time with you to confirm that the retirement plan you choose fits in with your overall financial plan.

We are here to help you flourish as you grow towards your goals by managing your assets, working on your risk tolerance as an investor, and recommending and executing a portfolio to help grow your retirement savings. Get in touch with us to learn more about SEP IRAs and determine your ideal next steps.

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The information contained in this article represents the opinion of Oakwell Private Wealth Management and should not be construed as personalized or individualized investment advice.