Time to lower your taxes with a SEP IRA
getty
The 2021 tax season is here, and if you’re self-employed, the SEP IRA may hold the key to slash your 2020 taxes owed. Business owners and those with a 1099 are likely eligible to contribute to a SEP IRA. For those who earned more than expected (or just didn’t save enough for the taxes that would be due), the SEP IRA could be your last-minute get-out-of-jail-free card. That’s assuming you are able and willing to make a large contribution to get the big tax savings.
The Simplified Employee Pension Plan (SEP IRA) is a type of retirement account for people who are self-employed or those who own their own businesses. A SEP IRA is more like a 401(k) than a Defined Benefit Pension Plan. One of the best features of this specific type of retirement account is that it can be set up and funded between year’s end and your tax filing deadline.
How Does A SEP IRA WORK?
A SEP IRA is funded pre-tax, which means you will get a tax deduction when you make a contribution. However, taxes will be owed when you eventually make a withdrawal from your SEP IRA. This type of IRA gives you the ability to potentially invest a significantly larger amount of money compared to other IRAs, which are capped at contributions of $6,000 per year.
Contribution Limits for a SEP IRA In 2020
You can sock away up to a fourth of your income up to the maximum limit. For 2020, that number was $57,000. If you are looking ahead to 2021, you can contribute another $1,000 for a grand total of $58,000 per year. Your entire contribution will be tax-deductible. The only drawback to these plans is they don’t come with a catch-up provision for those over 50. (A great reason to look ahead at a Solo 401(k) for 2021 if you are looking to put away as much money as possible).
MORE FOR YOU
Who benefits the most from a SEP IRA?
A business owner who works as a sole proprietor on up to an LLC, Partnership, S or C Corp can benefit from contributing to a SEP IRA. This plan is especially useful if you don’t have employees. Or perhaps, your only employee is a spouse or close family member. If your company has employees, you may need to contribute the same percentage as you give to yourself. If you have employees, the required contributions may limit the net savings of funding a SEP IRA.
You can still set up and contribute for 2020.
A SEP IRA is really great for those looking to make a last-minute tax-deductible contribution for the past year. If you would like to contribute the maximum amount possible in 2021, check out the Solo 401(k), in addition to a SEP IRA. Most of you will be able to make larger tax-deductible contributions and, if you are over 50, you will be able to save an additional $6,000, per year, as a catch-up benefit.
There is still time to open a SEP IRA for 2020 and low