How to save on tax bills using a SEP IRA
There are three ways in which a SEP IRA can help individuals save on taxes while boosting their retirement savings at the same time. Which ones are you willing to give a try?
A Simplified Employee Pension or SEP plan lets small business owners make tax-free contributions toward their employees’ retirement plan, but SEP IRA accounts can also offer significant tax savings on income.
If you’re self-employed, running a small business, or making money aside from regular income at work, a SEP IRA can help you increase your tax-deferred retirement savings. Reducing your tax bill and maxing out your contributions every year can help you build a larger nest egg by the time you retire.
Here’s how a SEP IRA can help you save on taxes and boost your retirement savings:
1. Tax-deferred retirement savings
Since a SEP IRA is funded with pre-tax dollars, investment income is tax-deferred. Interest, dividends and capital gains from funds held within the account are not included in your annual taxable income, and you only pay taxes on distributions.
With tax-protected reinvestment and compound interest, your retirement fund can grow much larger in the long run. This is especially important when you’re self-employed or don’t have an employer-sponsored pension plan at work.
2. Business expense deductions
Contributions to a SEP IRA count as business expenses, which helps to reduce net profit and taxable income for the business:
For self-employed professionals and business owners contributing to their own SEP IRA, adjusted gross income and federal income tax are lower.
For self-employed individuals or small business owners contributing to their employees’ SEP IRA, both self-employment tax and income tax are reduced.
For corporations contributing to employee SEP IRAs, income tax is lower and contributions are exempt from Medicare and Social Security taxes.
3. Setup and funding dates
Unlike a traditional IRA and other retirement plans, a SEP IRA can be adopted and funded after the close of the tax year, right up to the tax return due date and any extensions that apply.
The current year’s business expenses can be included in the previous year’s tax return if needed. This helps you decide how much to contribute based on your current financial condition, as well as spread out contributions over a longer period for more effective budgeting.
(Featured image by DepositPhotos)
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
[Week 23] The TopRanked.io Weekly Digest: What’s Hot in Affiliate Marketing
This week we're bringing you top-secret CIA know-how on hacking people's minds and bending them to your will. And if...
Large Traditional Banks Manage 75% of Spanish People’s Investments in Funds
There are three main reasons why Spaniards prefer traditional banks to manage their investments. The first of these is due...
Atomic Wallet Hack: Stolen Cryptocurrencies End Up at North Korea-Linked Coin Mixer
As the aftermath of the Atomic Wallet hack unfolds, it highlights the ongoing challenges associated with securing crypto assets and...
Italian Parliament Will Work on Regulating the DLT Market
The integration of DLTs into corporate law starting with the representation of financial products and instruments in digital form is...
Ibions Seeks Investors and Anticipates Revenue of €1.5 Million in 3 Years
The objective of this first round of investment is to complete the development of the platform through which the company...
Crypto2 weeks ago
Bitcoin Surges 4% after US Debt Limit Suspension Deal
Crypto3 days ago
Can Blockchain Games Provide Sustainable Income?
Featured1 week ago
Cedacri Prices New €275M Bond to Pay €50M Tax and €150M Extra Dividend
Crypto5 days ago
DE-ART Dematerializes “Physical” Works of Selected Artists through NFT
You must be logged in to post a comment Login