What Is a SEP IRA?

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About two-thirds of employees nationwide have access to retirement benefits through their employers, according to the Bureau of Labor Statistics. But if you are the employer, your retirement benefits are up to you. Fortunately, even the smallest businesses have options. A Simplified Employee Pension (SEP) IRA allows self-employed people, small business owners and their employees to build tax-deferred retirement savings with higher contribution limits than individual IRAs.

How a SEP IRA Works

As an employer or self-employed person, you can set up a SEP IRA plan to contribute tax-deferred dollars toward your retirement and your employees' retirement (see IRS Form 5305-SEP for details). Contributions are deductible on Schedule C of the employer's tax return, up to the contribution limits outlined below. SEP IRA accounts grow tax-deferred until the money is withdrawn. Here are some additional rules for SEP IRAs:

  • An individual SEP IRA account is opened for each employee.
  • SEP IRAs are funded with employer contributions only: no employee contributions or matching.
  • Contributions can vary from year to year.
  • The contribution rate must be the same for all eligible employees.
  • Contributions for the year should be made by the company's tax filing deadline, but there is usually no separate filing requirement for SEP IRA plans.

Who Qualifies for a SEP IRA?

Self-employed people and business owners qualify to establish and contribute to SEP IRAs, both for themselves and for eligible employees. Eligible employees include anyone who meets these IRS requirements:

  • Age 21 or older
  • Has worked for the employer in at least three of the past five years
  • Has received at least $650 in compensation (2021 and 2022)

Employers can set eligibility rules that are less restrictive than the IRS guidelines, but they can't set rules that are more restrictive. Eligible employees remain eligible even if they die or terminate their employment before a contribution is made.

SEP IRA Contribution Limits

If SEP IRA eligibility guidelines work for you, contribution limits are generous. Among the four basic types of IRAs available to self-employed people and business owners, SEP IRAs offer a clear advantage:

2021 Contribution Limits by IRA Type
IRA Type2021 Contribution LimitCatch-up contribution (for people over 50)
Traditional IRA$6,000$1,000
Roth IRA$6,000$1,000
SIMPLE IRA$13,500$3,000
SEP IRA$58,000 or 25% of compensationNone

Employer contributions to an employee's SEP IRA account can't exceed 25% of the employee's compensation or $58,000, whichever is less. In 2022, the dollar limit rises to $61,000. SEP IRAs do not allow catch-up contributions for people 50 or older.

If you're self-employed, your compensation is defined as your net earnings from self-employment, minus half of your self-employment tax and any contributions you've made to your own SEP IRA. Learn more about self-employment contributions in IRS Publication 560.

Contributions are always fully vested, meaning that you and your employees have access to the money in your SEP IRA accounts immediately. You can withdraw your money at any time but will have to pay income on it when you do, along with a 10% additional tax if you're under 59½.

Start Funding Your Retirement Now

If you're interested in setting up a SEP IRA, consider talking with a financial advisor to understand your options and to make sure you comply with IRS requirements.

A SEP IRA plan can be a great way to establish retirement benefits for yourself and your employees—and take advantage of generous contribution limits that can help employers and employees alike save enough in retirement for their age.