How Do Discretionary Contributions Work?
With a SEP IRA, the employer can utilize discretionary contributions to their employees accounts. This means that they can decide on a year-to-year basis whether or not they want to contribute anything to the accounts. As an employee, this might sound discouraging because it may seem like there is no reason for your employer to contribute to your account. However, there are two reasons that an employer would want to put money in your account. First of all, they will get a tax deduction for every dollar that they put into an employees retirement account. This lowers their taxable income for the year and in turn, their tax liability. In addition, the percentage that goes into each employees account in the company has to be uniform. This means that whatever percentage of money they put into their own retirement account, they have to put into your retirement account as well. Therefore, if the owner of the company wants to contribute to their retirement, they will also have to contribute to
Related Questions
- Must an employer contribute fixed and/or discretionary contributions to the accounts of employees during their periods of military service?
- Can the plan participants withdraw their discretionary matching contributions before they retire or otherwise leave their job with us?
- What is the deadline for depositing employer matching, discretionary, or required contributions?
