How Can an SEP IRA Help You Save on Your Tax Bill?

Posted on Oct 16, 2017

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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. 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.

Tax bill

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 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, an 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.

Since a SEP IRA boosts business deductions and reduces taxable income, it can help small businesses, freelancers and self-employed professionals lower their tax bills significantly. To get expert investment advice and learn more about tax savings with various retirement plans, contact Self Directed Retirement Plans today!

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