Simplified Employee Pension IRA Account

There are two ways to take advantage of the SEP IRA tax features:

1. Employer contributions to a SEP IRA are tax-deductible to the employer.
2. Employees may contribute to their SEP IRA. If you are self-employed, you can potentially make contributions to your SEP IRA both as an employer and as an employee to max out your tax benefit. Investments grow tax-deferred until you remove assets from your account.

Potentially lower tax rate

Another tax benefit of a Traditional IRA may come into play when you remove the assets in retirement. IRA distributions are taxed at your ordinary income tax rate during the year the money is withdrawn. This is the secondary benefit if your tax bracket is lower at this time as you may no longer be working.

Any IRA contributions that were not tax-deductible should not be taxable when withdrawn from your account.

The employer contribution to the account may not exceed the lesser of 25% of the employee’s compensation or $61,000 for 2022 or $66,000 for 2023.

The IRS sets the contribution limits to SEP IRA Accounts for employee contributions and these limits can change each year. In addition, if have reached age 50 on or before December 31 of the year in which the contribution is made, you may be eligible to contribute an additional amount called a “catch-up” contribution. Lastly, the participant can also make an annual IRA contribution up to $6,000 in 2022 and $6,500 in 2023 and individuals ages 50 and older can make an additional catch-up contribution of $1,000. The IRA contribution may not be deductible. However, your IRA contribution can’t exceed your earned income for that tax year.

There is no investment minimum to open the account. Subsequent employee contributions must be at least $50 unless establishing an automatic investment, which can be done for as little as $50.

Investments made to an IRA or retirement account that are above allowable limits are called excess contributions. This can also happen if you were ineligible to contribute in the first place. In either scenario, excess contributions may be subject to additional taxes or penalties.

There may be several methods to remedying an excess contribution, but it’s always best to consult a certified tax advisor to find which solution works best for your situation. Contact us to learn about your excess contribution options with Janus Henderson.

Employer Contributions

The deadline for employer contributions depends on the tax year in which the SEP IRA is maintained. For example, if the SEP IRA is maintained on a calendar year basis, the employer deducts the yearly contributions on their tax return for the year within which the calendar year ends.

An employer may also file their tax return and maintain the SEP IRA using a fiscal year or short tax year.

In essence, Janus Henderson will accept the employer’s contribution based on the due date of the employer’s return (including extensions). Janus Henderson will report all employer contributions in the year they are received even if the contribution is for a prior year (see IRS instructions for forms 1099-R and 5498).

Employee Contributions

Employees can contribute to a SEP IRA with contributions for a specific tax year starting January 1 of that year and you must make all contributions for the tax year by the tax filing deadline, which is typically April 15 of the following year.

Generally, employees cannot make contributions after that date even if filing for an income tax extension.

There is no cost to open an account and no annual maintenance fees when account minimum thresholds are met.