The acronym SEP IRA stands for self-employed person independent retirement account. This type of account services business owners or independent contractors. Since these individuals do not have access to a corporate 401(k) program, they can use the IRA option to save for retirement and receive tax benefits on those savings. 

SEP IRA Contribution Limits

You can contribute a significant portion of your income each year, up to $49,000 in 2010, toward your retirement account. The amount should not exceed 25 percent of the income of an individual operating an incorporated business. For an independent contractor, the contribution maximum is 20 percent of the individual's net profit on an annual basis.

SEP IRA Tax Benefits

Once you have placed your funds into the IRA each year, they become a tax deduction on your return. You can minimize your taxable income through this method. In addition to the deduction, the account grows on a tax deferred basis. You do not have to pay income or capital gains tax on the account until you begin to make withdrawals at age 59-1/2. If you are putting money away for retirement, then, it makes sense to use an IRA for the tax benefits it offers.

Can you make tax deductible contributions to your SEP IRA?

Simplified Employee Pension plans allow for tax deductible contributions, as do many IRS-approved plans. When you contribute from your paycheck, you can deduct the amount you contribute from your annual income. This applies for self-employed persons as well, but these individuals may have to contribute on a quarterly basis since they do not receive regular paychecks. The amount you can contribute and deduct from your taxes is subject to an annual maximum based on your income. This limit is in place to ensure that low-income individuals receive comparable benefits to high-income individuals. 

What are the SEP IRA contribution limits?

The annual SEP IRA contribution limits apply to both the individual SEP IRA and the total sum of tax deductible contributions across IRS- approved plans. The annual limit for SEP contributions is $5,000 for individuals under 50 and $6,000 for those over 50 as of 2010. The total sum any employer can contribute to an employee's retirement, taking into account a 401k plan where applicable, is $49,000 for 2009 and 2010. If the employee's annual salary is lower than $49,000, the employee's salary is the annual maximum contribution limit to retirement plans. 

What are the SEP IRA early withdrawal rules?

The main funding vehicle for an SEP IRA is a traditional IRA, and this means an investor will be penalized for SEP IRA early withdrawals much the same as he or she would be for withdrawing early from any other IRS-sanctioned tax deferred account. First, the individual must pay taxes owed on the withdrawal at the current income tax level. Second, the individual will be required to pay a 10 percent penalty on the total amount withdrawn. These penalties will be assessed if the investor withdraws funds anytime before reaching the minimum qualified age of 59 1/2.

Who is eligible for an SEP IRA?

Any employer may establish an SEP IRA plan, including a corporation, partnership or sole proprietorship. Even an independent business owner may set up an SEP IRA for his or her company regardless of whether he or she is the company's only employee. These plans are designed to be easier to administer for small business owners, so they are typically used by companies that lack the infrastructure to fund a traditional IRA. Instead, a company offers employees the opportunity to participate by opening their own individual retirement accounts. Then, the employer helps fund these accounts through the SEP IRA plan. 

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