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What is a SEP IRA and how does it work?

Help your employees save for retirement with this simpler, more affordable workplace retirement plan.

Business owners who want to help their employees save for retirement have several workplace retirement plan options to consider, each with its advantages and disadvantages. Employers who want to contribute toward their employees’ retirement as well as their own retirement savings might consider a simplified employee pension (SEP) individual retirement account (IRA). But these IRAs come with some limitations that might make them a less favorable option for employers and employees alike.

What is a SEP IRA?

A SEP IRA is a type of IRA that business owners can use as a workplace retirement plan. Businesses of any size can open and fund a SEP IRA for their employees, including freelancers and self-employed individuals. SEP IRAs function similarly to traditional IRAs in terms of taxes and withdrawal rules, but they offer a higher contribution limit.

SEP IRAs at a glance

Type of employerAny size business
Who can contributeEmployers
Contribution limits

The lesser of $69,000 or 25% of the employee’s compensation for tax year 2024(1)

Eligibility requirements

Employees at least 21 years old who worked for your business in at least 3 of the last 5 years and who will receive at least $750 in compensation in 2024 must be included in the plan(2)

Employers can use less restrictive requirements to determine eligibility

Tax statusPre-tax
Deductible contributions

Employers can deduct the lesser of their contributions or 25% of the employee’s compensation(3)

Access to funds before age 59.5Employees are always 100% vested and can withdraw money at any time but will incur a 10% early withdrawal penalty if younger than 59.5

How does a SEP IRA work?

The easy setup and low-cost operation of a SEP IRA compared to other workplace retirement plans make these retirement accounts attractive for many employers. To put a SEP IRA in place, the employer must:

  1. Execute a written agreement to provide benefits to all eligible employees.
  2. Choose a financial institution to act as the SEP IRA custodian. This can be a broker, bank, credit union or other financial institution that offers SEP IRAs.

Once established, the employer contributes to the account, and the employee is responsible for investing that money. Available investment options depend on what the IRA custodian offers and can include everything from stocks and exchange-traded funds (ETFs) to bonds and mutual funds. Employees can also choose to roll over their SEP IRA assets tax-free to other IRAs and retirement plans.(4)

Unlike some other workplace retirement plans, only employers contribute to the account. However, employees can both receive employer contributions to a SEP IRA and contribute to their own traditional IRA or Roth IRA. An employer’s SEP IRA contributions do not affect the amount an employee can contribute to their own IRA. (3)

SEP IRA contribution limits

For 2024, the maximum an employer can contribute to a SEP IRA is the lesser of $69,000 or 25% of the employee’s compensation. The Internal Revenue Service limits the compensation you can use to calculate the 25% limit to $345,000 in 2024,(2) meaning only the first $345,000 of an individual’s compensation is considered for contribution calculations. However, the calculated contribution can not exceed the annual contribution limit set by the IRS, which is $69,000 in 2024.

SEP IRA taxes

A SEP IRA functions like a traditional IRA in terms of taxes. Earnings in the account grow tax-deferred, which means the money grows tax-free until the employee makes qualified withdrawals in retirement, at which time the money is taxed as regular income. While employees can access their money at any time, any distributions before the age of 59.5 will typically be subject to a 10% early withdrawal penalty in addition to regular taxes. At age 73, employees are required to start taking withdrawals from their accounts.

Employers can generally deduct their contributions on their business’s tax return.(3) If you’re self-employed and make contributions for yourself, you need to calculate your maximum deduction for these contributions using a special computation that considers your net earnings from self-employment. Your net earnings from self-employment takes into account the deduction for the deductible part of your self-employment tax and the deduction for contributions to your own SEP IRA.(5) Consider getting help from a financial advisor to ensure you’re properly calculating your allowable deduction.

SEP IRA rules to remember

As with all types of retirement plans, the IRS sets specific rules for SEP IRAs. Consider these rules as you decide whether a SEP IRA is right for your business.

  • You don’t have to contribute to your employees’ SEP IRAs every year, but when you choose to contribute, you must contribute to every eligible employee’s account.(4)
  • You must contribute the same percentage of salary for all participants.(4)
  • Your plan’s eligibility requirements can be less restrictive than the IRS requirements, but not more. Employees at least age 21 who have worked for you in three of the past five years and will earn at least $750 in 2024 must be included in the plan.

Are SEP IRAs insured?

SEP IRA assets held within depository accounts such as savings accounts or certificates of deposit (CDs) are generally insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC)(6). However, SEP IRA investments held in securities such as stocks, ETFs or mutual funds are not FDIC-insured.

Additionally, SEP IRAs held at brokerage firms that are members of the Securities Investor Protection Corporation are protected up to $500,00 against the loss of cash and securities if the broker goes under.(7)

Our top picks for brokers that offer SEP IRA accounts

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How to set up a SEP IRA

  • Establish plan documents. Execute a written agreement using Form 5305-SEP or your own plan document and provide information about the SEP IRA to eligible employees.
  • Choose a SEP IRA trustee. Explore and compare SEP IRA providers, considering factors like investment options, fees, customer support and platform functionality.
  • Submit your application. Most SEP IRA providers offer simple online application processes. However, the online application might be reserved for self-employed business owners. If you’re a business owner with employees, you may need to complete a paper application. Be prepared to supply personal information, such as your and your employees’ names, dates of birth and Social Security numbers.

Benefits and drawbacks of SEP IRAs – are they worth it?

Before putting a SEP IRA in place for your business, weigh the pros and cons of these accounts.

Pros

  • Large contribution limits. Contribute up to the lesser of $69,000 or 25% of the employee’s compensation.
  • Contributions are tax-deductible. Employers can generally deduct their contributions.
  • SEP IRAs are simple to establish and operate. SEP IRAs are easier to set up and operate than 401(k)s.
  • Investment flexibility. Employees can invest in most assets, including stocks, ETFs, mutual funds and more.
  • Employees are 100% vested. Employees own all the money in their account.

Cons

  • Equally proportional contributions. You must contribute the same percentage of employee compensation as you do to your own SEP account.
  • No Roth form of the account. SEP IRAs are structured as traditional IRAs only.
  • No employee contributions. Only employers can contribute to a SEP IRA for their employees.
  • No catch-up contributions. Unlike a 401(k), SEP IRAs don’t allow for catch-up contributions for employees age 50 or older.
  • No participant loans. Employees can’t take loans from their SEP IRA like they can with a 401(k).

Compare brokerages that offer SEP IRA accounts

Narrow down top brokers by annual fee, stock trade fee and more to find the best for your financial goals.

1 - 6 of 6
Name Product Minimum deposit Annual fee Retirement account types
SoFi IRA
Finder Score: 4.2 / 5: ★★★★★
SoFi IRA
$0
$0 per month
Roth, Traditional, SEP, Rollover
Trade stocks, options, ETFs, mutual funds and alternative asset funds, with no-cost financial advice and a no-cost robo-advisor.
JP Morgan Personal Advisors
Finder Score: 3.3 / 5: ★★★★★
JP Morgan Personal Advisors
$25,000
0.6% on balances of $25,000 to $249,999

0.5% on balances of $250,000 to $1,000,000

0.4% on balances of $1,000,000+
Roth, Traditional
Ongoing access to an advisory team with personalized, expert-built portfolios. Provider terms & conditions apply
Robinhood Retirement
Finder Score: 4.4 / 5: ★★★★★
Robinhood Retirement
$0
0%
Roth, Traditional, Rollover
Boost your retirement savings with 1% in matching funds on every dollar contributed, transferred or rolled over to a Robinhood IRA.
Vanguard IRA
Finder Score: 4 / 5: ★★★★★
Vanguard IRA
$0
0.3%
Roth, Traditional, SEP, Spousal, Rollover
Save for retirement with Vanguard's commission-free stocks, ETFs and 160+ no-transaction-fee mutual funds.
Interactive Brokers IRA
Finder Score: 4.5 / 5: ★★★★★
Interactive Brokers IRA
$0
N/A
Roth, Traditional, SEP, Rollover
Choose from 6 IRA account options, with access to stocks, ETFs , futures, currencies and more.
Acorns Later
Finder Score: 4.2 / 5: ★★★★★
Acorns Later
$0
$3 per month
Roth, Traditional, SEP
Automatic ETF investing with as little as $5. Annual fee of $3, $5 or $9 per month depending on subscription.
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SEP IRA vs SIMPLE IRA vs Solo 401(k)

SEP IRAs, savings incentive match plans for employees (SIMPLE) IRAs and Solo 401(k)s are all retirement plans designed for business owners and self-employed individuals. But there are some key differences.

SEP IRASIMPLE IRASolo 401(k)
Type of employerBusinesses of any size

Businesses with 100 or fewer employees(8)

Business owner with no employees, or that person and their spouse(9)

Who can contributeEmployersEmployers and employeesThe business owner as both the employer and employee
Contribution limitsLesser of $69,000 or 25% of the employee’s compensationEither matching contribution up to 3% of compensation or 2% nonelective contribution for each eligible employeeBusiness owner can contribute both:
  • Elective deferrals up to 100% of compensation up to $23,000 in 2024
  • Employer nonelective contributions up to 25% of compensation
Tax statusPre-taxPre-taxPre-tax and Roth
Withdrawal age to avoid penalties59.559.559.5
Investment optionsWide range of investmentsWide range of investmentsWide range of investments
More flexible than company-sponsored 401(k)s

Bottom line

SEP IRAs can serve as effective retirement savings vehicles for business owners and self-employed individuals. They allow for deductible contributions for employers and, like traditional IRAs, tax-deferred retirement savings growth for employees. If you think a SEP IRA is right for your business, check out the best IRAs of 2024 to get started.

Frequently asked questions

What is the downside of a SEP IRA?
Some downsides to a SEP IRA include the lack of catch-up contributions if you’re age 50 or older and the lack of a Roth form, which allows for tax-free withdrawals in retirement.

What is the difference between an IRA and a SEP IRA?
The main difference between a traditional IRA and a SEP IRA is who establishes and contributes to the account. Individuals open traditional IRAs and contribute money toward their own retirement, whereas employers open and contribute to SEP IRAs for their employees.

When can you withdraw from a SEP IRA without penalty?
Withdraw from a SEP IRA without penalty at age 59.5.

When is the deadline for a SEP IRA contribution?
You have until the tax filing deadline to make contributions for the prior year.(3)

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