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Sunday, December 5, 2021

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When Are Simplified Employee Pension (SEP) IRA Contributions Due?

The simplified employee pension individual retirement account (SEP IRA) is a cheap possibility for small enterprise house owners who wish to supply retirement advantages to their staff. The employer may contribute to their very own SEP account.

Because the identify implies, organising and managing a SEP IRA is streamlined in comparison with procedures for establishing and sustaining different qualified retirement plans used largely by huge companies, such because the 401(k).

Notably, contributions to a SEP IRA are made fully by the employer. Workers, nonetheless, could open their very own Individual Retirement Account (IRA) and contribute as much as the annual limits.

SEP contributions should be made by the tax-filing deadline for the 12 months during which they’re made. Here’s a nearer have a look at SEP IRAs, how contributions work, and when they’re due.

Key Takeaways

  • In a typical 12 months, employers should contribute to a SEP IRA by the tax-filing deadline, which is normally April fifteenth.
  • If the employer has filed an extension, then the ultimate SEP IRA contribution date is the extension deadline, which is normally October 15.
  • The utmost contribution to a SEP IRA is $58,000 in 2021 (rising to $61,000 in 2022).

Contribution Deadline for SEP IRAs

Employer contributions to a SEP IRA are made in tax-deductible {dollars}. Enterprise house owners, together with the self-employed, may open a SEP IRA account and contribute to their very own retirement financial savings.

In both case, the deadline is similar. Contributions should be deposited into each worker’s SEP IRA account by that 12 months’s tax-filing deadline, which is often April 15 of the next 12 months.

If the employer has filed an extension, then the ultimate SEP IRA contribution date is the extension deadline, which is normally October 15.

For instance, say John earns $50,000 a 12 months at XYZ Corp. The corporate desires to contribute 15% of every worker’s compensation to their SEP IRA accounts in 2021. Which means that John will obtain a $7,500 contribution to his SEP IRA for 2021.

In a traditional 12 months, XYZ Corp. would have till April 15 the next 12 months to make the contribution to the worker SEP IRA accounts. If XYZ has filed a tax-filing extension till October 15, then the contributions should be made for John and all different staff by that date.

SEP IRA Contribution Limits

One of many benefits of a SEP IRA is that it has a lot increased contribution limits than a traditional or Roth IRA. In each 2021 and 2022, the annual contribution restrict for a conventional or Roth IRA is $6,000, plus $1,000 for these aged 50 or older.

With a SEP IRA, in 2021, an employer can contribute as a lot as 25% of an worker’s gross annual wage or $58,000, whichever is much less (rising to $61,000 in 2022). To find out their annual limits, self-employed enterprise house owners should make a particular computation that elements within the deductible portion of their self-employment tax.

With a SEP IRA, employers could change their contribution ranges from 12 months to 12 months based mostly on enterprise concerns.

With a 401(ok), employers could match a proportion of the worker’s contribution. However within the SEP IRA, the contribution is fully as much as the employer and might change from 12 months to 12 months.

In impact, this makes it a form of profit-sharing plan. When enterprise is nice, the employer could make a beneficiant contribution, as a lot as 25% of every worker’s wage. When enterprise is unhealthy, the employer could cut back or remove the corporate contribution.

This isn’t a bonus plan, although. If an employer has a SEP IRA, an equivalent proportion of wage should be deposited for every eligible worker.

What Is the 2021 Contribution Restrict for a SEP IRA?

The contribution restrict for a SEP IRA in 2021 is 25% of the worker’s compensation or $58,000; the lesser of the 2. In 2022, this quantity elevated to $61,000.

Who Is Eligible for a SEP IRA?

Workers are eligible for a SEP IRA if they’re 21 years or older, have labored for the enterprise for at the very least three of the final 5 years, and have acquired at the very least $650 in compensation for 2021 and 2022 from the enterprise.

What Is a Drawback of a SEP IRA?

The first drawback of a SEP IRA is that it doesn’t permit for worker contributions. Different retirement plans, comparable to a 401(ok) or 403(b), permit staff to contribute a part of their revenue to a plan. With a SEP IRA, you’re reliant solely in your employer to contribute cash for you.

The Backside Line

A SEP IRA is a method for small enterprise house owners to offer their staff with a retirement plan. With a SEP IRA, an employer makes the contributions versus the worker, and so they should achieve this earlier than the tax submitting deadline of the next 12 months.

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