Definition
A SEP-IRA is a retirement plan for self-employed individuals and small business owners with high contribution limits.
How It Works
The employer contributes a percentage of compensation, up to an annual cap that is far higher than a standard IRA limit. Contributions are deductible to the business and grow tax-deferred.
Example
A self-employed consultant contributes a large percentage of net earnings to a SEP-IRA, taking a sizable deduction.
When It Works Best
It works well for solo business owners or those with few employees who want simple, large, deductible contributions.
Who It Applies To
Self-employed individuals and small business owners.
Watch-Outs
A pre-tax SEP balance can interfere with a clean backdoor Roth due to the pro-rata rule, and contributions for employees must be proportional to the owner's.
