Everything about sep ira


sep ira

Contributions to a SEP IRA are tax-deductible as long as you meet specific requirements. In addition, funds in your SEP-IRA account will grow on a tax-deferred basis until you withdraw them or the account terminates. For those unfamiliar with the term, “tax-deferred” means that you do not have to pay income tax until the funds are withdrawn from the account.

Contributions:

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When you reach age 70-1/2, you must begin taking required minimum distributions (RMDs). If you do not take your RMD for a year, then you have to pay a 50% excess accumulation penalty on top of your regular income tax for that year.

The deadline for contributing to a SEP IRA is the filing due date of your tax return, which is generally April 15th every year. However, if you obtain an extension to file your income tax return (Form 4868) by June 15th, then you can also get an extension to make contributions (by July 15th).

If you have employees, then you must comply with rules that govern SEP IRA plans. In addition, the contribution amount cannot be more than 25% of your compensation (but see what can happen if your contribution is too high below). If it is not clear how much you contributed based on your records, then use a good estimate.

For example, if your compensation is $50,000 for the year and you contribute $25,000 to a SEP IRA for that year, then your contribution percentage would be 50%.

You can make contributions to each employee’s SEP-IRA account up until the due date of their income tax return (including extensions). In addition, you can contribute on behalf of yourself if you are self-employed. If your SEP-IRA account exceeds $250,000 at the end of this year, then you may be subject to a 6% excise tax on excess contributions.

What happens if my contribution is too high?

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If it is clear that you contributed too much to your SEP IRA plan, then you can correct this mistake and avoid paying a penalty. To fix the excess contribution:

Remove the excess contribution (and earnings) by the date your income tax return is due (including extensions). If you do not make this correction on time, then you will be subject to an excise tax of 6% for each year that you do not correct the excess contribution.

For purposes of determining whether your SEP IRA contributions exceed $55,000 (or 25%) of compensation, amounts distributed as a corrective distribution are not considered employer contributions and will be included in income taxes.

If you receive distributions from your SEP IRA before you reach age 59-1/2, then the earnings will be subject to a 10% early distribution penalty. In addition, if your SEP-IRA account terminates before the employee reaches age 59-1/2, then any distributions made from that date forward until the time of termination will be subject to a 25% excise tax.

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