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What is a simplified employee pension (SEP) retirement plan (SEP IRA)?
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).
TAKEAWAYS
- SEP IRAs allow higher contribution limits than traditional or Roth IRAs.
- Only employers make contributions, including for themselves if self-employed.
- Contributions are generally tax-deductible and grow tax-deferred until withdrawal.
What is an SEP
An 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.
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 $70,000 for 2025¹
Compensation up to $350,000 in 2025¹ (indexed annually for inflation) 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.
How much will an SEP IRA reduce my taxes?
SEP IRA contributions are generally tax-deductible for the business, which can lower your taxable income for the year. Because contributions grow tax-deferred, you won’t pay taxes on investment earnings until you withdraw funds in retirement. This can be especially valuable in higher-income years, when reducing current tax liability is a priority. Working with a financial professional can help ensure your contributions align with both your tax strategy and long-term goals.
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.
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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.
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SEP FAQs
SEP IRAs are typically low-cost, with minimal setup and administrative fees compared to 401(k) plans. This makes them an attractive option for small business owners and self-employed workers.
You can open and fund an SEP IRA up to your business’s tax filing deadline, including extensions.
Eligible employees who worked for you in any three of the last five years must be included in the plan.
No, only the business can sponsor the SEP; partners participate through that plan.
Yes, you can contribute to both, subject to IRS contribution rules.
Yes, as the employer, you’re responsible for keeping the plan compliant with current IRS rules. Stay up to date on the latest requirements at IRS.gov or consult your financial advisor.
Often yes, but coordination rules apply. Check with a financial professional to fully understand your options.
Withdrawals are taxed as income and may incur a 10% penalty before age 59½. Required minimum distributions begin at age 73¹.
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A NYLIFE Securities Registered Representative can help determine what’s right for you.
1Internal Revenue Service. “Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)” and annual cost-of-living adjustments. IRS.gov.