What is a key characteristic of a SEP IRA?

A key characteristic of a SEP IRA, or Simplified Employee Pension Individual Retirement Account, is indeed the higher contribution limits available for self-employed individuals and small business owners. This retirement plan allows an employer to make contributions on behalf of eligible employees, including themselves if they are self-employed.

For 2023, self-employed individuals can contribute up to 25% of their compensation, or the annual limit set by the IRS, providing a significant opportunity to save for retirement compared to traditional IRAs or 401(k) plans. This feature is particularly attractive for those who may want to maximize their retirement savings in a tax-advantaged way, contributing a larger amount proportional to their income compared to other retirement accounts.

The ability to contribute higher amounts is essential for self-employed individuals who may wish to catch up on retirement savings or save more in years with higher income. This makes the SEP IRA an excellent option for those in variable income situations, typically characteristic of self-employment.