SEP IRA

A Simplified Employee Pension Plan, or SEP IRA is a type of low-cost retirement savings plan for that allows small business owners (including sole proprietors) to make retirement savings contributions for their employees. It offers many of the major tax advantages of a regular IRA without the administrative hassle of typical retirement plans such as the 401(k).

There are several types of employer-sponsored retirement plans. Unlike a SIMPLE IRA, into which employee contributions are made, in a SEP IRA, only the employer makes contributions to the account. They are ideal for self-employed people who wish to offer retirement benefits or save for their own retirement. Certain SEP IRA rules apply, learn more below.

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SEP IRA FAQs

Am I required to make a SEP plan contribution every year?

No, you are not required to make a SEP IRA account contribution every year. You can also vary the amount you choose

Are there employees I can exclude from my SEP plan?

When it comes to excluding employees from a SEP plan, employees who are covered by a collective bargaining agreement OR who are nonresident aliens with no U.S. source income can be excluded. This is also along with the employees who haven’t met the eligibility requirements for the IRA plan.

Can any employer establish a SEP plan?

Yes, any type of employer, including a self-employed individual, can establish a SEP IRA plan.

Does the SEP plan limit the amount I can contribute to my IRA?

No, having a SEP plan doesn't affect the ability to make annual contributions to a traditional or Roth IRA, but there are maximum contribution limits for each type of investment option. Additionally, to your SEP contributions, you can make traditional or Roth contributions of up to $7,000, plus a $1,000 catch-up contribution if you are 50 years of age or older. Participating in a SEP plan may affect your ability to take a tax deduction for a traditional IRA contribution (depending on your income.)

How do I establish an SEP plan?

The employer signs a written agreement SEP plan document then the IRS offers a free SEP agreement (IRS Form 5305-SEP). This agreement can be used to adopt the SEP plan. Custodians and IRA trustees also provide SEP plan documents.

The employer then must notify the employees that the SEP plan has been established with a financial institution. The employer should also provide them with information about the SEP plan.

Eligible employees must then set up a traditional IRA that will receive the contributions. (SEP plan contributions cannot be made to a Roth IRA.)

Are there SEP IRA contribution limits?

You and each employee can contribute up to 25% of compensation or $69,000 (for 2024), whichever is less. Generally, you must contribute the same percentage of compensation for each eligible employee, and employer contributions for this plan are tax deductible on your business tax return.

What additional paperwork is required to set up a Simplified Employee Pension (SEP) account?

In addition to the Traditional IRA Simplifier, the two-page SEP Adoption Agreement is required to establish a SEP account.

What are the benefits of a SEP plan?

This type of plan is easy set up, simple to oversee, and reasonably priced compared to other types of retirement plans, such as 401(k). For an SEP plan there are no compliance tests and filing annual reports with the IRS is not mandatory for employers.

What is a SEP plan?

This is a type of retirement savings plan for a business that allows the business to make retirement savings contributions for its own employees. Then every eligible employee can set up a traditional Individual Retirement Account to receive the employer SEP contributions.

What is the deadline to establish a SEP plan?

Up until the employer’s tax return deadline, including extensions is when an employer can establish a SEP plan. For example, if a sole proprietor wanted to make a SEP plan contribution for tax year 2017 they would have until their tax return deadline in 2018 to set up the SEP plan and make a 2017 contribution.

When can I take money out of my SEP IRA?

You can take withdrawals from your IRAs, even SEP contributions, at any time. However, the distribution will typically be included in taxable income in the year of the distribution and may be subject to a 10% early distribution income tax penalty for early withdrawal if you are not yet age 59½. As with other types of retirement accounts, required minimum distributions begin at age 73.

Which employees do I need to cover?

Your SEP plan must cover employees who have

- attained age 21,
- worked for your business for at least 3 out of the last 5 years, and
- received at least $750 in compensation for the year.

You can choose to apply less restrictive eligibility requirements.