What Is a SEP IRA

What Is a SEP IRA

Trying to decipher the many savings options and opportunities for retirement is not easy- and it only gets more complicated as a business owner or self-employed person. A SEP IRA is one type of account that helps people prepare for the future- but what is it, how does it work, and what are the pros and cons of choosing this path?

This comprehensive guide covers everything you need to know about opening, funding, managing, and participating in a SEP IRA account. It looks at their potential or processes for business owners, self-employed individuals, employers, and employees. We discuss the rules, regulations, and implications of this type of account- and how it compares to other popular retirement savings plans.

What Will I Learn?

Understanding SEP IRAs

First things first- what is a SEP IRA? Here is a detailed introduction to this account type, how it works, and the pros and cons of having one. Before diving in, we would advise you to learn about the individual retirement account (IRA) in our comprehensive guide, where we provide a detailed explanation of an IRA.


SEP IRA Definition

It may look like just a bunch of letters, but it does all mean something! The letters stand for Simplified Employee Pension (SEP) and Individual Retirement Account (IRA). A SEP IRA is essentially a retirement savings plan aimed at small business owners. Like traditional IRAs, contributions to SEP IRAs are tax deductible and tax-deferred, so the savings can grow over time until the account owner retires. When they start taking distributions, those withdrawals are taxed as income.

ira rollover paperwork process

Key Features

  • Funded with pre-tax dollars
  • Tax-deferred savings
  • Tax-deductible contributions
  • Employer contributions
  • Designed for self-employed individuals or owners of small businesses with few (or no) employees
  • Simplified employee pension plan for long-term savings
  • Can extend to include eligible employees

How Does a SEP IRA Work?

SEP IRAs, at their core, work the same way other IRAs do. By that, we mean:

  • They offer tax-advantaged retirement benefits.
  • Withdrawals should not be made until the account owner is 59.5 years old.
  • There are annual contribution limits.

A SEP IRA is more like a traditional IRA than a Roth IRA. There are two reasons for this. First, it is funded using pre-tax dollars, and tax is paid on withdrawals. Secondly, there is a required minimum distribution age (73)- at which point a certain amount of money must be withdrawn annually. Where things get a little different with a SEP IRA is the fact they are specifically for business owners. Annual contribution limits are much higher since they are technically business accounts.

However, business owners with employees who qualify for SEP IRA participation (more on that later) must contribute on their behalf as well. What’s more, that contribution must be an equal percentage to your own. In other words, if you contribute 10% of your compensation to your SEP IRA, you must also contribute 10% of the employee’s compensation to the employee’s SEP IRA. Because of this, SEP IRAs tend to be most beneficial to those who are self-employed with no employees or run a very small business with only a few employees- if any.

The Benefits of a SEP IRA

  • High contribution limits: $66,000 for 2023, $69,000 for 2024
  • Simple setup and minimal administrative responsibilities
  • Possible to combine with traditional or Roth IRAs
  • Flexible contributions- no annual commitment to certain amounts
  • Tax-deductible contributions (including those paid into employee retirement accounts)

The Drawbacks of a SEP IRA

  • No Roth version available (after-tax contributions for tax-free withdrawals later)
  • Catch-up contributions are not allowed later in life
  • Must contribute proportional amounts for all eligible employees
  • Minimum distributions required from age 73
  • 10% penalty on early withdrawals before 59 1/2 years old (some exceptions apply)

Setting Up a SEP IRA

We now know how it works, but what about how to get started? Here is everything you need to know about establishing a SEP IRA.

Who Can Establish a SEP IRA?

Only registered business owners and self-employed individuals. Employees cannot set up a SEP IRA- the employer must be the one to establish it.

What Are the Eligibility Requirements for Establishing an Account?

Any sole proprietors, corporations, or partnerships can establish a SEP IRA- as long as they are registered and licensed in the USA. Most IRA brokerages require any person establishing a SEP IRA to have an Employer Identification Number (EIN).

How to Set Up a SEP IRA: Step-by-Step Guide

One of the most appealing details of a SEP IRA plan is how easy (and affordable) it is to set up. They were designed to encourage employers to offer some sort of employer’s retirement plan who may otherwise offer nothing- and have been kept as straightforward as possible to boost the incentive. Here is a step-by-step run-through of how to set up a SEP IRA.

  1. Choose a SEP IRA provider. This can be a bank, mutual fund company, insurance company, or other financial institution offering IRA services.
  2. Complete the registration requirements from your chosen SEP IRA company. You need to apply for a SEP IRA before you open it, but your chosen provider can help.
  3. Fill out IRS form 5305-SEP (this may be included in your provider’s setup service).
  4. Provide relevant information to eligible employees and set up separate SEP IRAs for each individual. They also need to submit an application.

SEP IRA Setup Timings and Deadlines

You have until April 15 (or October 15 if you apply for a deadline extension) to set up a SEP IRA. This is in line with the tax filing deadline for most small business owners.

Participating in a SEP IRA

The next thing you need to consider is the process for participation in SEP IRAs- your own and for your employees. Remember, it is the employer’s responsibility to arrange this.

sep ira employee benefit for 21 years or older

What Are the Requirements for Eligible Employees?

Who counts as an eligible employee for SEP IRA employer-sponsored retirement plans? The rules are fairly simple.

  • The employee must be aged 21 or older.
  • They must have worked for you three out of the last five years.
  • Their earnings must be at least $750 for the previous year (subject to annual change).

You can adjust your rules to be less exclusive, if you wish, but you cannot be more exclusive than the IRS. That said, the IRS allows you to exclude employees who:

  • Are part of a union agreement after retirement benefits were agreed in good faith
  • Are immigrants with no other US-based compensation

The Three-of-Five Rule Explained

The three-of-five rule stipulates that a person must have been employed by the company at any point during at least three of the last five years. It does not apply to contractors or freelancers- only full-time employees. Looking at 2024, for example, an employee who has worked for the company since 2021 (and meets the other requirements) would be eligible. However, an employee who only joined the company in 2023 and has not worked for the company before would not be included.

If an employee worked for a company full-time during 2020 and 2021, left the company for a while, and re-joined in 2023, they would still be eligible for SEP IRA participation. It doesn’t matter how much of the year they worked for you. If they joined in December of 2021, 2021 still counts- as long as they earned the minimum requirement for that year.

Who Cannot Participate in a SEP IRA?

You can exclude any employee who does not meet the eligibility requirements, but you can also choose to include them if you wish. Immigrants and non-residents with no US bank account cannot participate.

SEP IRA Benefits for Employees

SEP IRAs are beneficial to anyone who participates. The primary advantage for employees is that their employer must contribute to their account on an equal level to their own SEP IRA contributions. That means that an employer contributing an additional 10% of their compensation to their SEP account has to do the same for the eligible employee.

Employees do not contribute anything or pay any fees for these accounts. They also don’t need to make any investment decisions- it is all handled on their behalf. In essence, this is free retirement savings. That said, they will pay tax on the funds when they eventually withdraw them.

Funding a SEP IRA

Overall, the funding methods for SEP IRAs are essentially the same as a traditional or Roth IRA. You can arrange funding through transfers, rollovers, or direct contributions- as long as you stay within the annual limits.

Remember, whatever you contribute as the employer to your own SEP IRA, you must match (as a percentage of compensation) for all eligible employees who have accounts set up as part of your SEP plan. Depending on the SEP IRA plan set up by an employer, the employee may also be able to contribute funds as an individual. This works like a traditional IRA, with annual limits applied for all accounts combined.

Understanding SEP IRA Contributions

How do contributions work? SEP contributions are generally made annually- no later than the tax filing deadline. The employer (a.k.a. the one who established the account) pays contributions into their SEP IRA and the SEPs of all eligible employees.

You are not tied into making the same contributions every year. If one year is particularly successful, you can contribute up to 25% of your earnings (just remember that you need to match that percentage for all the employees who have a SEP IRA through your business. Say the next year is tough- you don’t have to contribute anything to anyone if you don’t want to.

funding sep ira

SEP IRA Contribution Limits

In 2023, the annual limit for SEP IRA contributions was $66,000. This figure increased to $69,000 for 2024. That said, you cannot contribute more than 25% of your compensation.

If you earn $200,000 in a year, the maximum you can pay into your SEP IRA is $50,000. Those who earn $500,000 are limited to $69,000. In other words, annual contributions cannot exceed the lesser of $69,000 or 25% of earnings. An employer cannot pay more into their own SEP than they do their employee’s accounts.

Determining SEP Contributions for an Employee

SEP IRA contributions for non-self-employed individuals (in other words, an employee whose employer set up a Simplified Employee Pension that they are eligible for) are determined based on their annual compensation.

Things that are generally included in the compensation calculation for an employee are wages, overtime, bonuses, tips, commission, vacation pay, sick pay, and general salary-related remuneration. Examples of what is not included when calculating total compensation are worker’s comp, severance pay, a non-taxable benefits.

The limit for annual compensation for an employee for use in determining SEP IRA contributions is $330,000. Anything they earn over this amount is not included in the calculation. To determine how much the contribution should be, the employer must first decide what percentage of their own earnings they will contribute to their account. As IRS regulations stipulate, they must match this percentage for all employees eligible under the SEP IRA plan.

Say, for example, the employer has set the contribution at 10%. If the employee’s total annual compensation is $60,000, the SEP employer contribution would be $6,000. Your written SEP agreement (acquired during the setup process) provides detailed information about how contributions should be determined according to the plan specifics you agreed on in the beginning. Refer to this if you are ever uncertain.

Determining SEP Contributions for a Self-Employed Individual

Self-employed individuals should determine their eligible annual compensation for SEP IRA purposes using the regulations provided in Internal Revenue Code section 1402 (a). It refers to self-employment net earnings and what qualifies.

Once you know your eligible earnings, you can determine your contribution based on how much you can afford. As long as you don’t exceed the limits, you can choose whatever amount works best financially. Just remember to match it (the percentage) for any other employees in your plan.

SEP IRA Funding Rules

  • SEP IRAs are primarily funded by employer contributions.
  • Employees may contribute up to $6,500 (under 50 years) or $7,500 (over 50 years) annually to their SEP IRA, as long as this is stipulated in the plan. Anything funds they send to this account reduces how much they can contribute to any personal IRAs they hold.
  • Individual contribution limits are not affected by employer contributions in any way.
  • The annual limit for an employer was $66,000 in 2023 but is $69,000 as of 2024.
  • Contributions can only be made in cash- property, commodities, or other assets are not accepted.
  • Funds must be added before the tax-filing deadline for your company.

Managing a SEP IRA

One of the main perks of SEP IRAs is how easy they are to manage after you set them up. There are very few administrative responsibilities that fall to you, and the investing is all taken care of.

Generally speaking, your main management responsibility is making sure contributions are made on time to everyone who is eligible- and that the amounts are correct. Missed payments or excess payments can cause problems with the IRS, so it is important to manage them efficiently. Here is an overview of the SEP IRA management and administrative responsibilities you need to think about.

Contribution Rules and Regulations

We have already talked a fair bit about the rules surrounding account contributions for yourself and your employees. Here is a summary of the most important details to remember.

  • The total contributions to an employee’s SEP IRA are capped at $66,000 for 2023 and $69,000 for 2024- or 25% of their compensation (whatever figure is lower).
  • Employer contributions to their own SEP IRA must be of an equal percentage to funds contributed to employee accounts.
  • All SEP IRA contributions must be made in cash.
  • You can contribute to a SEP IRA once per year. The amount can be whatever you want (within the limits), and there is no obligation to contribute anything.
  • Payments must be equal between all employees.
  • Contributions must be made before the annual federal income tax return deadline.
  • Employer contributions are the primary funding in SEP IRAs, but employees may be able to add extra funds as a traditional IRA contribution if the plan allows.

Contribution Ownership

SEP IRA contributions are vested immediately. This means that the employee has immediate ownership of the funds deposited as soon as the contribution is made. If there is a mistake and the employer needs to remove funds from an employee SEP IRA (excess payment, miscalculation, etc.), they cannot do so without the consent of the account holder.

gold ira vs roth ira withdrawal rules

Basic Withdrawal Rules

The withdrawal rules for Simplified Employee Pension (SEP) are the same as traditional IRA withdrawal rules. All withdrawals are taxed at the same rate as a person’s income. The income tax bracket you are in at the time of withdrawal will determine how much tax you pay when you take money out of your SEP IRA.

You can access your SEP IRA funds penalty-free from age 59 and a half. If you withdraw funds before that time, you will face a 10% tax penalty on top of the income tax owed. There are a few exceptions to that rule. You may qualify for penalty-free withdrawals before age 59 and a half if:

  • You are buying your first home ($10,000 limit)
  • You are adopting a child or giving birth to a child ($5,000 per child within a year of the birth or adoption)
  • You are paying for higher education expenses for yourself, your child, or your grandchild (rules and specific qualifications apply)
  • You are unemployed (under certain circumstances) and need to pay health insurance premiums
  • You have unreimbursed medical expenses exceeding 7.5% of your annual adjusted income
  • You are a beneficiary of the account, and the original account owner has died
  • You (the account owner) have a qualified disability (total and permanent)

Even if you qualify for a penalty exemption on an early SEP IRA withdrawal, you (or the beneficiary of the account) with still owe income tax on the amount taken. You must withdraw funds once you reach the age of 73. These are known as required minimum distributions and are calculated based on your life expectancy and account balance at the end of the previous year.

Rollovers and Distributions

The required minimum distributions that begin at 73 are not a problem for most people- since the idea of IRAs is to provide regular income during retirement. That said, not everyone wants to be forced to take the money at a certain time in a certain amount.

Required minimum distributions are set up by the IRS to essentially recoup the income tax they are yet to receive on your savings. The amount you need to take is also determined by the IRS. They look at how much you have in the account and your life expectancy and work out an annual amount accordingly. Your RMD is subject to change and is re-assessed regularly.

Converting to a Roth IRA

The only IRA that does not have required minimum distributions is a Roth IRA. It is possible to convert your SEP IRA to a Roth, but there are pros and cons to consider.

Any funds rolled from a SEP to a Roth IRA would be taxable. That means you would have to pay income tax on the amount converted before it went into your Roth. This is fine if you can afford it- and if you expect to be in a higher tax bracket by the time you reach 73.

You must also wait at least five years before withdrawing funds from a Roth IRA. When you do, the withdrawals are tax and penalty-free no matter what age you are. Converting a SEP IRA to a Roth account is most advisable for wealthy savers who plan to leave the funds untouched- perhaps as part of their estate to go to heirs.

Rollover to Traditional IRA

The withdrawal rules and regulations for a traditional IRA are exactly the same as a SEP IRA. They are also effectively the same type of account for tax purposes, so it is easy to roll over from one to the other. Reasons for doing this may include:

  • Consolidation of retirement funds
  • The company the SEP was established undergoes out of business
  • You change employer

You can arrange a SEP to traditional IRA rollover in three ways- a trustee-to-trustee direct transfer, a direct rollover, or an indirect rollover. Trustee transfers and direct rollovers are more or less the same. Both transactions are arranged between the account responsible- either the financial institution holding the account for you or the plan administrator. In both cases, no tax is withheld.

An indirect rollover is a little different. When a distribution is paid out to you directly, you can pay it back into a different IRA within 60 days. Tax will be taken from the distributions, so you need to replace the deducted amount with other funds. The easiest solution is a trustee-to-trustee transfer.

Filing and Notice Requirements

Although SEP IRAs are comparatively hands-off on the admin side of things, employers do need to fulfil a few filing and notification requirements. Luckily, it is nothing all that complicated. You must provide your employees with the following information.

  • A written agreement detailing the Simplified Employee Pension plan: This can be provided via a copy of IRS form 5305-SEP if you are following standard guidelines or another official document or form with a clear explanation of your plan specifics.
  • Written notice of any amendments or new requirements in the SEP employer plan
  • An annual statement for all contributions

sep ira ways to avoid calculation errors

Avoiding and Correcting SEP IRA Errors

It is possible to make a mistake somewhere along the line- either in the plan setup or when calculating contribution amounts. Understanding the types of errors that occur and what options you have to correct them can help keep your SEP IRA running smoothly.

Common SEP IRA Operating Mistakes

Here are a few of the more common operating mistakes people tend to make with their SEP IRAs. All are manageable and- more importantly- fixable.

  • Eligible employees have been excluded from participating in the plan.
  • You miscalculated compensations, which has led to an incorrect contribution amount.
  • There is an irregularity between amounts- meaning one or more employees have received more or less than everyone else (determined by the percentage of compensation contributed).
  • Your contributions exceed the maximum annual limit.
  • The SEP plan document has not been updated to stay in line with current laws.

Consequences of Making a Mistake

The most common consequence of SEP IRA mistakes is the loss of tax benefits. This applies when an error in the plan means it fails to meet the IRS legal requirements. Luckily, you are given plenty of opportunities to identify and correct any mistakes that could put you at risk.

Steps to Correct Errors

Luckily, the IRS understands that mistakes can happen- and does not penalize too harshly before giving ample opportunity and support to correct errors. Finding the mistake is the first step- then you can use the IRS Fix-It Guide and various other resources to find the official solutions to put things right.

Preventing Errors in SEP IRA Management

Prevention measures for SEP IRA management errors vary depending on the mistake. There are three primary error categories: paperwork problems, wrongly excluded employees, and incorrect calculations. Here are the best ways to avoid each one.

  • Stay in close contact with your SEP IRA provider to get the latest updates. Your paperwork should never slip out of date if you are on top of things and well-informed.
  • Review employee information carefully every year to ensure no eligible person is missed. If you are unsure, speak to your account advisor for confirmation.
  • Always verify and confirm all figures before moving to the next step. Create a detailed compensation checklist for each employee and keep track of numbers throughout the year. Use reliable calculation methods and have the numbers reviewed before making the contributions.

Ending a SEP IRA

If, for whatever reason, you no longer want an SEP IRA, you can terminate it at any time. You won’t lose the money in the account, and you can keep the savings stored there long after the termination, but the requirements, responsibilities, contributions, and investment options will cease. A SEP IRA is one of the easiest retirement savings accounts to terminate.

one of the reasons for sep ira termination is going out of business

Reasons for Terminating a SEP IRA

There are several reasons an employer may decide to end their SEP IRA account. Here are some examples.

  • They go out of business.
  • They are unhappy with the current SEP IRA provider and agreement.
  • They are retiring.
  • It does not make financial sense for their business anymore.
  • They have decided to change to a different retirement plan for themselves and their employees.

How to Terminate a SEP IRA

It is quite easy to terminate a Simplified Employee Pension plan if you need to. All you need to do is speak to the financial institution holding your SEP IRA and inform them that you will be making no further contributions and want to end the contract. They may suggest alternative solutions, but it is up to you whether you want the plan terminated and what future savings plans you make.

After informing the IRA provider that you wish to end the agreement- you will usually get confirmation fairly quickly. There is nothing else you need to do at this point. If you want to empty the account, you can roll over the funds to another IRA or qualified retirement account. Once you reach the minimum age requirement, you can withdraw the funds in whatever way you want. Funds can remain in a SEP IRA even if the plan is terminated.

Notification Requirements When a SEP Terminates

  • You do not need to notify the IRS when you terminate a SEP IRA.
  • It is generally advisable to notify any employees included in the SEP plan, but it is not technically mandatory.
  • Even though you don’t legally need to inform employees of the SEP termination, it is best practice to notify them in writing to give them a clear warning and the opportunity to make new plans.

SEP IRA Versus Other Retirement Plans

As you may have noticed, SEPs are not the only retirement savings account in town. There are several ways to manage long-term savings. It helps to know the differences between them and who can benefit the most from various types of IRAs. Here are some SEP IRA comparisons with other popular retirement accounts to help you get a better idea of how they stack up for you.

SEP IRA vs. Individual 401(k)

There are many similarities between a SEP IRA and a 401(k). They are both designed as retirement savings accounts. Both accounts have the same maximum annual contributions and allow employer contributions. That said, there are some notable differences.

Although the contribution limits are the same for a 401(k) and a SEP IRA, the maximum income level is different. Someone earning anything over $150,000 can contribute $66,000 (as of 2023) in one calendar year if they use a 401(k). Comparatively, a SEP IRA owner would need to earn at least $264,000 to contribute that amount.

This is because SEP IRA contributions are capped at 25% of a person’s total earnings. If you earn $150,000, you could only contribute $37,500.The second important difference between a 401(k) and a SEP IRA is the possibility of taking out a loan. This is possible against a 401(k), but not allowed with a SEP IRA.

These traits put a 401(k) in the lead, but there are some benefits to consider on the SEP side. A Simplified Employee Pension (SEP) plan requires very little administration on your part, and the costs are significantly lower than other accounts. A 401(k) requires a bit more work from you- and will cost you more in setup and account fees.

SEP IRA vs. Traditional IRA

Don’t be fooled by the three letters connecting so many types of accounts- they are actually quite different. That said, there are a few obvious similarities. The first individual retirement account worth comparing to a Simplified Employee Pension (SEP) is a traditional IRA. Let’s begin with the things they have in common.

  • Contribution limits to both accounts are made pre-tax, and withdrawals are taxed as regular income.
  • You cannot withdraw funds before you are 59 1/2 without paying a 10% penalty (unless you qualify for an exemption).
  • Both accounts have required minimum distributions from age 73, so you have to take the money out whether or not you want or need it.

Now, let’s look at the differences.

  • SEP IRAs allow employer contributions. Traditional IRAs do not.
  • The annual contribution limits for traditional IRAs are $6,500 if you are under 50 and $7,500 if you are over 50. You can contribute up to $66,000 (increased to $69,000 for 2024) or 25% of your earnings (whatever is lower) to a SEP IRA.
  • Employer contributions are tax-deductible- which saves you money if you are depositing into your own account as an employee of your own company.

rules and regulations for money withdrawal from ira and 401k

A traditional IRA is the better choice for an individual who expects to be in a lower tax bracket when they retire. SEP IRAs are better for self-employed people and small business owners who want to make the most of tax-deductible savings and higher contribution limits. You can’t open a SEP IRA if you are not a registered business owner of some kind.

SEP IRA vs. Roth IRA

Roth IRAs do the same things as traditional IRAs but backwards. Instead of taking pre-tax contributions and taxing withdrawals, they are funded with after-tax dollars, and withdrawals are tax-free. There is no option to operate a SEP IRA in this way.

Another important difference between Roth IRAs and SEP IRAs (and traditional IRAs, for that matter) is the fact they have no minimum distribution age. You don’t have to take money out of your Roth IRA if you don’t want to. It can sit there for as long as you want- ideal if you intend to leave it to your heirs as part of their inheritance.

Again, Roth IRAs do not allow employer contributions. A Roth IRA is preferable for individual savers who expect to be in a higher tax bracket when they retire.

Choosing the Right Retirement Plan

As you can see, there is quite a lot of variety in retirement savings plans. If anything, the similarities between some accounts only make things more complicated! How can you make sure you pick the right plan for your retirement savings? Here are a few important things to consider.

Would You Rather be Taxed Now or Later?

If you are torn between a Roth IRA or a traditional IRA, the first question you should ask yourself is when you would rather pay tax. Remember, traditional IRA contributions (like SEP IRA contributions) are made pre-tax and then taxed as income when you withdraw funds. On the other hand, Roth IRA contributions are taxed before they go into your account, and you can withdraw them tax-free later.

Some people end up in a higher tax bracket when they reach retirement, while others drop to a lower rate. If your tax bracket is likely to go up, you are better off paying taxes now using a Roth IRA. Those in a high bracket now may prefer to wait- going with a traditional or SEP IRA instead.

Do You Expect to Need the Funds when You Turn 73?

Another thing to think about is your intentions for the fund. Although most people view their retirement accounts as the money they will live off of when they stop working, others have different ideas.

In some cases, people have several retirement accounts- some of which they don’t plan on using if possible. A Roth IRA is a popular choice for people who want to save money to be passed on to heirs. There is no required minimum distribution on a Roth IRA, so the entire amount can stay there for as long as you want it to. If you choose a SEP or traditional IRA, you will have no choice but to start withdrawals once you reach 73. That might not be a problem for most, but if it is for you, maybe consider a Roth IRA instead.

gold ira pros and cons benefits for small business owners

Are You a Business Owner?

SEP IRAs are exclusively for business owners and self-employed individuals. If this does not apply to you, then a Simplified Employee Pension is out of the question (unless your employer happens to set one up for their business, but that is somewhat out of your hands).

As a business owner, a SEP IRA lets you contribute more money annually- all in tax-deductible contributions. It is a cheap and easy account to set up and manage, and it is perfect if you are self-employed with no other employees. It is still a good retirement plan for business owners who only have a few employees. Whatever percentage of your compensation you contribute to your own SEP, you must match for each eligible employee.

What Other Employment-Based Retirement Savings Do You Have?

People who work for themselves may have very little in the way of retirement savings from their employment history. In this case, you want an account that lets you contribute as much as possible with as many tax advantages as possible. SEP IRAs and solo 401(k) accounts are great for those who are self-employed. You can contribute significantly more money each year (earnings-dependent for a SEP IRA).

Frequently Asked Questions

Can I contribute different amounts for different employees in a SEP IRA?

No, you must contribute equal amounts to each eligible employee due to IRS regulations.

Can I withdraw money from a SEP IRA before I retire?

Yes, you can. Account owners can withdraw funds at any time from a SEP IRA, but doing so before they are 59 and a half will result in income tax liability and a 10% penalty.

What are the tax implications of a SEP IRA?

SEP IRAs are tax-deferred savings accounts, meaning you contribute pre-tax dollars to build wealth over time. You don’t pay tax until you withdraw funds.

Can I have a SEP IRA and a traditional IRA at the same time?

You can contribute to a SEP IRA and a Traditional IRA at the same time, but limits apply based on what is being deposited where. Contributing to a SEP IRA may interfere with the tax-deductible status of your traditional IRA contributions. A tax advisor can help you find the right balance.

What happens if I make excess contributions to my SEP IRA?

If an excess contribution is made, it cannot be removed without the permission of the account owner. The employer can inform the employee of the excess- then the employee can authorize its removal. This should happen quickly before further action is taken.


A SEP IRA is an excellent retirement savings solution for sole proprietors, self-employed individuals, and micro-business owners. It offers high contribution limits, tax advantages, and flexible savings for employers and their eligible employees. The most important things to remember about SEP IRAs are:

  • Employers must contribute an equal percentage to eligible employees as they do to their own accounts.
  • You have until the tax return deadline to set up a SEP or contribute funds.
  • It is up to you how much you contribute each year, and there is no obligation to add anything if you don’t want to or cannot.
  • The 2024 limit is the lesser of $69,000 or 25% of your compensation.
  • Contributions to SEP IRAs are made pre-tax, but the account owner pays tax when they make withdrawals.
  • Penalties apply to withdrawals made before the account owner is 59.5 years old- and they must take distributions once they turn 73.

Understanding the rules, regulations, and implications of SEP IRAs helps savers make smarter and more informed decisions about the best way to prepare for retirement. Although this guide has covered the essentials of SEP IRA savings plans, it is worth speaking to a financial advisor about your options before moving forward.

Arthur Karter


Hi, I’m Arthur, and nobody wants to wake up in their 50s like me that they are in serious debt with minimal assets. This wake-up call forced me to reevaluate everything. After going through the school of Hard Knocks, I’m ready to help you by sharing the best retirement choices and how they differ from all the same-old, same-old options that financial advisors sell. These alternatives will help you build and protect your wealth.

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