Question

Which of the following characteristics describe SEP IRAs? (Check all that apply.)

a) Employer Contributions Only
b) High Contribution Limits
c) Employee Matching
d) No Early Withdrawal Penalty

Answer 1

SEP IRAs are characterized by employer contributions only, high contribution limits, and a lack of employee matching. Unlike Roth IRAs, they do not allow for tax-free growth, and unlike 401(k)s, there is no employee contribution. There is indeed a penalty for early withdrawals from SEP IRAs.

Step-by-step explanation:

Characteristics that describe SEP IRAs (Simplified Employee Pension Individual Retirement Accounts) include:

• Employer Contributions Only: SEP IRAs are funded solely by employer contributions, not by employees.
• High Contribution Limits: These plans allow for higher contribution limits compared to traditional IRAs, making them beneficial for employers seeking to save a substantial amount for retirement.
• Employee Matching: SEP IRAs do not have an employee matching feature, as contributions are made exclusively by the employer.
• No Early Withdrawal Penalty: SEP IRAs do carry a penalty for early withdrawals made before age 59½, similar to traditional IRAs and 401(k)s, often a 10% additional tax.

These options highlight some of the unique aspects that differentiate SEP IRAs from other retirement accounts, such as Roth IRAs and traditional 401(k)s.