What is a SEP IRA designed for?

A SEP IRA, or Simplified Employee Pension Individual Retirement Account, is specifically designed as a retirement plan for business owners and self-employed individuals. It allows these individuals to contribute to their own retirement savings while also enabling them to make contributions on behalf of their employees, if applicable. This plan provides a simple and tax-advantaged way for small business owners to save for retirement, with higher contribution limits compared to traditional IRAs, thus making it a beneficial option for building retirement funds.

The key benefits of a SEP IRA include the ease of administration and low compliance costs, making it particularly attractive for small businesses. Contributions to a SEP IRA are deductible as a business expense, which can further help business owners reduce their taxable income. This plan also gives business owners flexibility regarding contributions—where they can choose how much to contribute each year depending on the business's profitability.