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Thinking about a 2023 SEP IRA Contribution? Here Are 6 Rules You Need To Know! Thumbnail

Thinking about a 2023 SEP IRA Contribution? Here Are 6 Rules You Need To Know!

Are you thinking about making a Simplified Employee Pension (SEP) IRA plan contribution for 2023? If so, here are 6 rules you need to know.

Thinking about a 2023 SEP IRA Contribution? Here Are 6 Rules You Need To Know!

1. Only a business can make a SEP contribution.

If you are employed by someone else, you cannot make a SEP contribution using your employment earnings. Only a business or employer can make a SEP contribution. If you are a small business owner, or even a sole proprietor, you can qualify. These plans are a popular choice for small businesses because they are inexpensive and easier to administer than other retirement plans.

2. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA established by the employee.

One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. For 2023, business owners can contribute up to 25% of up to $330,000 of compensation, limited to a maximum annual contribution of or $66,000.

3. Once in the IRA, the funds are like any other IRA funds and are subject to all the rules that normally apply to IRAs. 

The funds immediately belong to the employee, and the employee can do whatever they want with them, including taking a distribution. It is not unheard of for employees to immediately take distributions as soon as the SEP contributions are made. This may not be a smart move as far as saving for retirement, but it is allowed. Distributions are taxable and will be subject to the 10% early distribution penalty if taken before age 59 ½, unless an exception applies.

4. If you make a SEP IRA contribution for 2023, you can still contribute to either a Roth IRA or a traditional IRA, as long as you are eligible. 

However, because you would be considered an active participant in an employer plan, it may prevent you from taking a tax deduction for an IRA contribution.

5. Your deadline for making 2023 contributions to a SEP is not the same as your IRA contribution deadline.

For IRAs, the deadline is generally the tax-filing deadline, not including extensions. For SEP contributions, if you have an extension to file your business’ tax return, the SEP contribution deadline is your deadline, plus extensions.

6. Generally, salary deferrals are not allowed to be made under the SEP IRA plan. If you are doing this, you usually have a problem.

However, there is a type of SEP called a Salary Reduction SEP Agreement (SAR-SEP). New SAR-SEPs were not allowed to be established after 1996, but those already in existence were permitted to continue. If this rare exception applies to you, you can continue to make salary deferrals to your SAR-SEP IRA.

By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC

Need help with planning a SEP IRA contribution? Contact us for a free conversation.

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 02/12/24, with permission. https://www.irahelp.com/slottreport/thinking-about-2023-sep-ira-contribution-here-are-6-rules-you-need-know, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.