SEP IRA in 2024: A Top Retirement Savings Plan for Small Businesses
For small businesses and self-employed individuals, the Simplified Employee Pension (SEP) IRA continues to be one of the most powerful retirement savings options. With increased contribution limits for 2024, SEP IRAs offer a significant way to build retirement savings for both employers and their employees.
What Is a SEP IRA? A SEP IRA is a retirement plan designed for small business owners, self-employed individuals, and those with variable income. The plan allows employers to contribute substantial amounts on behalf of their employees, much more than what’s possible with a traditional IRA. In 2024, SEP IRA contribution limits have increased, allowing even more opportunities for retirement savings.
SEP IRA Contribution Limits in 2024:
- Contribution Cap: Employers can contribute up to the lesser of 25% of the employee’s compensation or $69,000 in 2024.
- Compensation Limit: The annual compensation used to calculate SEP IRA contributions is capped at $345,000 in 2024, up from $330,000 in 2023.
- Employer-Only Contributions: One key feature of the SEP IRA is that it is solely funded by employer contributions. Employees do not contribute to their SEP IRAs directly, and the plan does not offer a catch-up contribution option for those over 50.
Deadline for Contributions: Employers can make contributions for the 2024 tax year up until the tax filing deadline of April 15, 2025. This flexibility provides business owners time to assess their profits and make meaningful contributions based on their financial situation.
Can You Contribute to Both an IRA and a SEP IRA? Yes! Participating in a SEP IRA through employer contributions does not prevent an individual from contributing to a traditional or Roth IRA. This allows employees to maximize their retirement savings. However, if an employee contributes personally to their SEP IRA, this reduces the contribution limits for their traditional or Roth IRA on a dollar-for-dollar basis.
New Roth Option for SEP IRAs: A major development for SEP IRAs is the introduction of the Roth option, thanks to the SECURE Act 2.0. Previously, SEP IRAs only offered pre-tax contributions, where funds grow tax-deferred but are taxed upon withdrawal. With the Roth SEP IRA, contributions are made with after-tax dollars, and withdrawals are tax-free, offering more flexibility for business owners and employees looking for tax diversification in retirement.
For more information and the latest updates, visit the IRS’s SEP IRA page.
Note: This article is intended for informational purposes only and does not constitute tax advice. For personalized guidance, please consult a tax professional.