SEP IRA (Simplified Employee Pension Plan): The Guide

If you’re self-employed, you may be wondering what options you have to save for retirement. The good news is that there are a few different retirement accounts for self-employed and small business owners depending on their need— SIMPLE IRA, Individual 401(k) and, the SEP IRA. Figuring out the best option for you and your retirement goals can be a challenge, but we got you covered. Here's everything you need to know about SEP IRAs.

A Simplified Employee Pension (SEP) account is an IRA for small business owners with one or more employees or anyone with independent (self-employed individual) income. These plans share some tax benefits with other retirement plans. However, the mandatory employer contributions and contribution limits set them apart.

• Benefits
• SEP IRA Rules
• Who Qualifies
• SEP Contribution Limits
• How to Set up a SEP
• Deadlines
• SEP IRA Distributions
• SEP IRA FAQs

The Benefits of Self-Directed SEP IRA

Many of our clients choose to open is a Self-Directed SEP IRA accounts because of their many benefits and ease of management.

1. Easy to set up and maintain

This flexibility is exactly what many small business owners or self-employed individuals are looking for in a retirement plan.

2. High contribution limits

The higher contribution limits allow you to invest in alternative assets (like real estate) faster. These can only be made by the employer.

3. Many investment options

The neat thing about a self-directed SEP IRA with IRAR is that the participants can invest in a wide variety of investment types. The self-directed SEP IRA has all the same limits and rules as a regular SEP but allows investments in alternative assets.

4. Adjustable contribution limits

For example, say a construction company opens a SEP plan for their employees. They chose this plan due to the cyclical nature of the industry, so in good years they can contribute more but in off years reduce the percentage.

5. No IRS reporting requirements

Unlike a 401(k), these plans do not have any reporting requirements.

6. NEW: SEP Roth IRA

A SEP Roth IRA is a new option for retirement savings for self-employed individuals and small business owners.  It became available as an option for retirement savings in 2023, thanks to the provisions included in the SECURE Act 2.0. It combines the contribution flexibility of a SEP IRA with the tax-free benefits of a Roth IRA. This means you contribute money you've already paid taxes on, but any earnings and qualified withdrawals in retirement are tax-free. 

SEP IRA Contribution Rules

SEP IRA contributions are made by the employer, pre-tax. That means an up-front tax break or tax-deferred savings for your business. The employee doesn't pay taxes until they withdraw the money from the account during retirement. 

While there aren't SEP IRA income limits for participation, the maximum contribution to a SEP IRA is based on a percentage of your net self-employment income. So, determining how much you can contribute to a SEP IRA is important.

The annual contributions allowed in a SEP are much higher compared to a maximum contributions allowed in a Traditional or Roth IRA. The SEP-IRA doesn’t allow for catch-up contributions at age 50 like other IRAs because the employer makes the contributions to the SEP, not the employee.

See Relevant: Self-Employed IRA Contribution Limits

Who Qualifies for a SEP IRA?

An employer or small business must set up the plan for employees to participate. However, not all employees may be eligible to participate in the SEP IRA. Employees must be included in the SEP IRA if they:

• Attained age 21;
• Worked for your business in at least 3 of the last 5 years;
• Received at least $750 in compensation for 2023 from your business.

The employer can decide to have requirements for eligibility that are less restrictive (i.e. attained age 18), but not more restrictive than what is listed above.

Also, the employer can exclude employees covered by a union agreement whose retirement benefits were bargained for in good faith by the employees' union.

If you are the employer and have no employees, you can still establish a SEP. You are considered the employee and would make contributions to the SEP from your small business.  

SEP Plan Contribution Limits

In 2023, the SEP contribution limit is up to 25% of compensation, with a maximum of $66,000. The SEP IRA max contribution amount increased to $69,000 for 2024. 

Since the employer is making the contributions, the amounts are related to the employee's salary or wages. This means that everyone’s contribution is the same percentage of their individual salary. 

For example, if you make a 25% SEP IRA contribution to your account, you also must make a 25% employer contribution for your employees' account who qualify to participate in the plan. Contributions must be made in cash; you cannot contribute property.

Another important thing to note is that an employer contribution to a SEP-IRA won't affect the amount an employee can contribute to a Roth IRA or a Traditional IRA. However, it may prevent the employee from receiving a tax deduction for contributions to a Traditional IRA.

How to Set Up a SEP IRA

If you are an employer, you can set up a SEP retirement plan for all eligible employees by executing a formal written agreement, form 5305-SEP that you get from your IRA custodian when you open the account. You must give each eligible employee a copy of the form. The SEP isn't considered adopted until you give each employee this information.

An individual retirement account (IRA) is established for each employee by the custodian for the employer to make contributions. IRAR can help you establish your SEP and employees’ individual retirement accounts. Once the accounts are set up, you will send the contributions directly to IRAR.

Set up and Contribution Deadline

Unlike the Traditional IRA or Roth IRA for individuals (which have a specific contribution deadline, generally April 15), SEPs are different. The deadline for establishing and contributing to a SEP IRA depends on when your business files its income tax returns.

The deadline for setting up a SEP IRA is April 15 or your business' tax-filing deadline including extensions. 

SEP IRA Distributions

Distributions from a self-directed SEP IRA work like any other tax-deferred IRA. Distributions are treated as ordinary income and subject to income tax (and if you are under the age of 59 ½, early withdrawal penalties) when a withdrawal is made by participants.

Required Minimum Distribution (RMD) rules apply to SEPs. Due to changes made by the SECURE Act in 2019, if your 70th birthday is July 1, 2019, or later, you do not have to take distributions until you reach age 73.

Conclusion

Deciding on the best retirement plan for self-employed individuals can be tricky. SEP IRAs offer a compelling option with high contribution limits.

The SEP max contribution for 2024 is $69,000, which is significantly higher than Traditional IRAs. This makes SEP IRAs a great way to save for retirement. If you're looking for the "best SEP IRA" or want to learn more about SEP IRA maximum contributions, consulting with a financial advisor can be a smart move.

What Can IRAR Do for YOU?

We know that navigating financial waters can be a frustrating and daunting task. Here at IRAR, our job is to alleviate the stress of self-directing your SEP IRA or finding the right strategy by providing you with comprehensive retirement plan education. We provide up-to-date information to help you make informed decisions.

We are a financial services company composed of the self-directed IRA industry’s top professionals. To learn more about who we are and how we can help you, book a free consultation. 

SEP IRA FAQs

When is the SEP IRA Contribution deadline?

The deadline to establish a SEP IRA is April 15, 2025, or the employer's tax filing deadline, including extensions.

What is a SEP IRA?

A SEP IRA or Simplified Employee Pension is a retirement plan for small businesses with one or more employees. You, the business owner count as an employee. The employee does not make contributions only the employer or company. This plan allows higher contribution limits than most IRAs.

Can an employee contribute to a SEP IRA?

No. An employee cannot contribute to a SEP IRA, only the employer. However, the employee can set up a separate Individual Retirement Account (IRA) and make contributions not to exceed the total allowed for the year.

What is the deadline to set up a SEP IRA?

You can set up a SEP IRA for your business before your business' income tax return due date (including extensions) for that year.