SEP IRA is one of the many retirement plans designed to help self-employed individuals and small-business owners save for their retirements. With a SEP IRA, you can contribute up to 25% of your income with a maximum contribution limit of $50,000 for the 2012 tax year, and $51,000 for 2013. Contributions are tax deductible and your savings grows tax-deferred until withdrawn. Upon withdrawal, or conversion to a Roth IRA, you will pay taxes on the amount withdrawn or converted at your regular tax rate.
You are eligible to contribute to a SEP IRA if you are a sole proprietor, in a partnership, or a business owner. Also, you are eligible if you earn any self-employed income, even if you are already covered by a retirement plan at your full-time job. The contribution deadline is usually April 15 of the following year — i.e., you have up to April 15, 2013 to contribute to your 2012 SEP IRA.
As mentioned above you can contribute the lower of 25% of your income or $50,000 for 2012 tax year (and $51,000 for 2013). For example, if you earned $100,000 eligible income, you can contribute $25,000 to SEP IRA (because you hit the 25% limitation). On the other hand, if you earned $400,000, you can contribute $50,000 (because you hit the maximum amount limitation).
In addition to SEP IRA, there are a few more retirement savings options that I’ll be exploring in future articles. These include:
Overall, SEP IRA is one of the best retirement savings plans for a self-employed individuals.