What is an SEP retirement plan?

The world is becoming more entrepreneurial. Self-employed workers and small businesses are growing, and an increasing number of individuals are starting side businesses to earn extra income.

While working for yourself can be exciting and rewarding, it can also mean that you aren’t able to get the type of benefits packages that larger employers offer. That doesn’t mean you have to miss out on saving for retirement, however. With an SEP retirement plan, you have options that can provide some of the same tax-advantaged benefits as an employer-sponsored 401(k).

Office workers around table

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.


Roth IRA

  • Your investments grow tax-deferred until you reach retirement, but they are taxed when funds are withdrawn.
  • Your investments are taxed ahead of time, grow tax-free until you reach retirement, and are not taxed when funds are withdrawn.
  • Contributions are tax deductible.
  • Contributions are not tax deductible; you have already paid taxes on them.
  • As an employer, you make contributions to your employees’ accounts.
  • Individual employees are responsible for making their own contributions.
  • Higher contribution limits ($69,000 in 2024).
  • There are lower contribution limits ($7,000 in 2024 and $10,000 in 2025, with optional catchup contributions of $1,000 for people aged 50 or over). 


Both SEP IRAs and SIMPLE IRAs are good for small businesses; however, there are some key differences (most notably that employees can add money to their SIMPLE IRAs), and you should speak with a financial professional to determine which one best meets your particular needs.


Simple IRA

  • Only employers can contribute to the SEP IRA.
  • Employees are allowed to add money through elective deferrals from their paychecks.
  • Typically implemented in companies with only a few employees, as each employee must receive the same contribution percentage. This can limit the amount the business owner is able to contribute to his or her own account.
  • Can be implemented only at companies with 100 or fewer employees, and employers must make contributions each year.
  • The employee contribution limit is $69,000 for 2024. There are no catch-up contributions for people aged 50 or older.
  • The employee contribution limit is $16,000 in 2024, with the option of a $3,500 catch-up contribution for people aged 50 or older. Employers can add additional contributions.

SEP IRA vs. individual 401(k)

This is a 401(k) plan designed for individuals instead of businesses. It’s sometimes called a one-participant 401(k) or solo 401(k). Contribution limits are the same as those for an SEP, but an individual 401(k) allows participants over age 50 to make additional catch-up contributions and post-tax Roth contributions. An individual 401(k) can come with higher running costs, however.


Individual or Solo 401(k)

  • Only employers can contribute to the SEP IRA.
  • Limited to self-employed individuals (and their spouses if the spouse works at least part-time for the business).
  • The employee contribution limit is $69,000 for 2024. There are no catch-up contributions for people age 50 or older.
  • The annual contribution limit is $69,000 in 2024, with the option of a $7,500 catch-up contribution. In 2025, the catch-up contribution limit will increase to $10,000. Can also make post-tax Roth contributions.
  • As an employer, you can make contributions to your employees’ accounts.
  • You are considered both employer and employee, and you can make contributions as both.

Frequently asked questions about SEPs

One of the main benefits of an SEP plan over traditional employer-sponsored programs is the affordability. Start-up and ongoing costs with a 401(k) can be high. That isn’t the case with SEP IRAs. This makes them an attractive option for small-business owners and self-employed workers.

If you want to set up your own SEP plan, you need to do it by your business’s income tax return deadline. If you’ve gotten an extension for your taxes, that also extends the window to set up your SEP IRA.

If you have employees, the 3-of-5 rule means that you must include any eligible employee in your plan if the employee has worked any three of the last five years for your business. You can choose less restrictive rules, if you’d like, including allowing employees to contribute immediately, but you don’t have to.

Only an employer can maintain and contribute to an SEP plan for employees. As a partner or member of an LLC, you are considered an employee and therefore cannot set up a separate SEP plan for yourself.

Nowadays, it’s not unusual for people to create their own businesses while simultaneously working full-time jobs. You can set up an SEP for your self-employed business while also participating in your employer’s retirement plan.

As the employer, it is your responsibility to ensure that your SEP plan abides by current law. Minimum requirements can and do get updated often, so be sure to stay up-to-date on the latest requirements at IRS.gov, or consult your financial advisor.


You can also amend your SEP plan at a later date if you want to have more restrictive or less restrictive requirements (as long as required minimums are still in force), but any new requirements you make must be applied to yourself as well as to your employees.

Most of the time, yes, but it can get complicated. A few options are incompatible with SEP IRAs. Talk to a financial services professional to fully understand your options and any potential conflicts.

When it comes time to start making withdrawals from your SEP plan, it functions exactly the same as a traditional IRA. You can take distributions at any time, but you will owe taxes on them, and they may be subject to a 10% penalty if they are taken out before you reach age 59½. At age 73, you will have to begin taking required minimum distributions. In order to realize maximum growth, it’s best to wait as late as possible before you take withdrawals from your SEP IRA.


If you want to get started saving for retirement, whether you’re a small-business owner or self-employed, our NYLIFE Securities LLC registered representatives can help you go over all your options. Depending on your unique situation and goals, one or more savings vehicles may be right for you. Reach out, and we can help you build a strategy to ensure a safe and satisfying retirement for you and your employees.


Want to learn more about investment strategies?

A NYLIFE Securities Registered Representative can help determine what’s right for you. 

This material is for informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

IRS.gov, 2023. “Simplified Employee Pension Plan (SEP).”