Tax and Retirement Savings with a SEP IRA

Every taxpayer wants to reduce her or his tax bill. Business owners, especially, are constantly on the hunt for tax deductions. In addition, business owners who want to retire some time in the future are looking for ways to fund that nest egg. My tax clients who own their own businesses ask about tax and retirement savings regularly. That’s at least one thing that COVID-19 hasn’t changed!

Good news for business owners who want tax and retirement savings – they can do both with a SEP IRA! A “Simplified Employee Pension Individual Retirement Arrangement,” or SEP IRA, is the retirement plan of choice for many small business owners. Here are three reasons why:

  • Easy and Flexible

A SEP IRA is easy to set-up with your bank, your investment advisor or a mutual fund. Just set it up and fund the account before filing the year’s tax return, or by the tax return due date, including extensions. Annual contributions amounts are flexible, which is good if business cash flow varies from year-to-year.

  • Generous Contribution Limits

A SEP IRA allows you an annual contribution of up to 25 percent of net business profits, after netting out the deductible half of self-employment taxes. That calculation is a little tricky so you’ll need some help to get it right. There is an annual dollar limit, too. For 2021, it’s up to $58,000. Contributions must be made for eligible employees.

  • No Costs

A SEP IRA has no start-up or operating costs that are often required for a conventional retirement plan. However, any investments selected to fund the account may have a management or investment advisory fee. It’s important to get a clear understanding of any fees or charges that will defray your retirement funds.

Business owners should keep in mind that distributions from a SEP IRA work just like a traditional IRA – any funds taken out before age 59½ are subject to a 10% early withdrawal penalty, on top of the federal and state income tax. 

Saving for today and tomorrow at the same time could be the best news of 2021! Business owners on the hunt for ways to achieve tax and retirement savings at the same time should set up and fund a SEP IRA. Want to know more? As usual, the IRS website has more helpful details, at