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SEP IRAs: The Business Owner’s Best Friend When It Comes to Minimizing Taxes Thumbnail

SEP IRAs: The Business Owner’s Best Friend When It Comes to Minimizing Taxes


Taxes are one of the biggest thorns in the side of business owners in America. The more you make, the more you owe – and it feels like taxes are constantly going up!

What’s a business owner to do? Today, we’re going to look at how business owners can leverage a SEP IRA to lower their company’s taxable income, thus lowering your tax burden. Read on to learn more!

What is a SEP IRA?

First, let’s sort out what these acronyms stand for:

SEP = Simplified Employee Pension

IRA = Individual Retirement Arrangement

SEP and IRA retirement accounts come in two forms, traditional and Roth. There are many differences between these two account types (read more here). Today, we are going to talk about traditional SEP retirement accounts.

In short, that means there is no limit on how much you can make and your contributions are tax-deductible, among other things.

So what’s so special about a SEP IRA? 

Two things: 

1. It allows you to save considerably more than a traditional IRA – In 2024, a SEP IRA allows contributions up to $69,000 or 25% of your income, whichever is less. Traditional IRA contributions max out at $7,000 (or $8,000 if you’re over 50). 

2. Contributions are tax-deductible for your business.

Here’s the thing: SEP IRAs are only available to business owners (which the IRS defines as “any employer, including self-employed individuals”). 

Related article: Top 5 Things Business Owners Should Know About a SEP IRA

But SEP IRAs are not just a handy retirement saving tool for business owners – if used correctly, they are a powerful tax planning tool. 

How SEP IRAs can Help Business Owners Minimize Taxes

The phrase “tax shelter” may feel a little shady, but the truth is that while there are illegal ways people shelter their income from taxes, there are a number of legitimate tax shelters – and SEP IRAs just happen to fall under that category!

SEP IRAs are funded by pre-tax dollars, so anything you contribute reduces your business’s taxable revenue, thus lowering your company’s burden at tax time and allowing you to keep more of your hard-earned money. To be clear, SEP IRAs only apply to the corporate taxes your company pays, not your personal taxes.

Let’s look at an example of how that would work:

An example

As we said above, SEPs limit you to contributing only up to the lesser of 25% of your income or $69,000. 

Say you are the sole owner of Acme, Inc. The company’s income this year is $900,000 and you take a salary of $300,000. 

If you contribute the maximum amount of $69,000 to your traditional SEP, your company’s income would drop to $831,000, lowering the amount of money the government taxes for your company. If you have a partner who owns your business with you, you could contribute to theirs as well, lowering your taxable income even further. 

You can contribute to SEPs for employees as well, although there are requirements to be aware of if you choose to do so. For instance, most SEPs require you to contribute the same percentage of income for everyone who participates. 

Fortunately, there are several other tax planning strategies that can help lower your tax burden on your personal income. A SEP IRA can only take you so far, but when combined with other strategies, you can put your taxable income in a whole different ballpark! A financial advisor can help you explore your options.

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