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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.

A SEP IRA can work for individuals who are self-employed, running a small business, or making money apart from their regular income. (Source)

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.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, get in touch with Rick.