What is a simplified employee pension?
A simplified employee pension (SEP) plan is a way for small-business owners and the self-employed to contribute toward their own and their employees’ retirements. Contributions are made to an individual retirement account or annuity (IRA) for each participant. The accounts are referred to collectively as an SEP IRA.
How does an SEP IRA work?
Traditionally speaking, SEP IRAs are utilized by self-employed individuals and small-business owners with few or no employees. As a business owner, you are responsible for contributing to your employees’ SEP IRAs on their behalf, and the employee contribution must be a percentage of compensation that is equal to the percentage you are contributing to your own account.
What are SEP IRA rules?
An SEP IRA is a basic individual retirement account, much like a traditional IRA, and it follows investment, distribution, and rollover rules similar to those of traditional IRAs. However, contribution limits are generally much higher than for traditional or Roth IRAs, and the way eligibility is defined is different.
Who can set up an SEP IRA?
Any employer can set up an SEP IRA, even if the “employer” is self-employed. First, you must choose a bank, insurance company, or other financial institution to serve as trustee of the SEP IRA. Once you fill out and sign a written agreement as the employer, you can set up an SEP IRA account for each eligible employee.
Who is eligible for an SEP IRA?
You and your employees may qualify for an SEP IRA. Employees must be included if they:
- Are age 21 or older.
- Have worked for your business for at least three of the last five years.
- Have made at least $750 in 2024 and 2023, $650 in 2022 and 2021, or $600 from 2016 to 2020.
If you wish to, however, you can provide SEP plans to employees who do not meet the minimum requirements.
What are SEP IRA contribution limits?
Contributions you make to each employee’s SEP IRA each year cannot exceed the lesser of:
- 25% of compensation or
- $69,000 for 2024
Compensation up to $345,000 in 2024 ($330,000 in 2023, $305,000 in 2022, $290,000 in 2021, $285,000 in 2020, and subject to cost-of-living adjustments for later years) may be considered.
For self-employed workers, there is a calculation you can make to determine how much you are able to contribute. It can be found on the IRS page here.
What are some other options?
An SEP IRA isn’t your only option for saving for retirement if you’re self-employed. There are many ways to invest in your future. Some may replace an SEP plan, while others can act as great additions to any retirement plan you have.
SEP IRA vs. Roth IRA
While both SEP IRAs and Roth IRAs offer tax benefits, Roth IRAs are generally designed to be supplemental to other retirement savings. The maximum you can contribute each year is much lower than the maximum with other options.