A SEP IRA (Simplified Employee Pension) is a retirement plan that allows business owners to make tax-deductible contributions to accounts set up for themselves and their eligible employees. It is designed for self-employed individuals, freelancers, and small business owners who want a simple, flexible retirement savings option with higher contribution limits than traditional or Roth IRAs.
Yes. SEP IRA contributions are discretionary. As the employer, you are not required to contribute every year. This makes the plan especially attractive to business owners with fluctuating income or seasonal businesses.
Yes. SEP IRA funds can be rolled over into a traditional IRA, another SEP IRA, or a qualified retirement plan like a 401(k), provided the receiving plan allows for incoming rollovers. Rollovers are not taxable if completed correctly.
No. One of the key advantages of a SEP IRA is the minimal administrative burden. Employers are not required to file annual IRS forms such as Form 5500, and no nondiscrimination testing is required. You simply report contributions as part of your businessโs annual tax filing.
Employees must generally be included in the plan if they are at least 21 years old, have worked for the employer in at least three of the past five years, and have earned at least $750 (2023) or the current IRS threshold. Employers may choose less restrictive rules but not more restrictive ones.
SEP IRA distributions are taxed as ordinary income in the year they are withdrawn. If withdrawals are taken before age 59ยฝ, they may be subject to a 10% early withdrawal penalty unless an IRS exception applies. Required Minimum Distributions (RMDs) begin at age 72.
Yes. SEP IRA contributions are generally tax-deductible for the business and do not count as taxable income to the employee until funds are withdrawn in retirement. This makes SEP IRAs an efficient way to reduce current-year taxable income.
Employers can contribute up to 25% of each eligible employeeโs compensation, up to the annual dollar limit set by the IRS. The same percentage must be applied uniformly to all eligible employees, including the owner. Contribution limits are significantly higher than those of a traditional IRA.
No. Only the employer contributes to a SEP IRA. Employees cannot defer part of their salary like in a 401(k). However, once contributions are made, the funds belong to the employee and are fully vested immediately.
Any business ownerโincluding sole proprietors, partnerships, LLCs, and corporationsโcan establish a SEP IRA. These plans are particularly well-suited for businesses with no or few employees and for self-employed individuals looking to make larger retirement contributions without complex administration.