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What is a
Simplified Employee Pension Plan (SEP IRA)?
Key Features
- Designed for self-employed individuals or small business owners with one or more employees.
- High contribution limits: up to $70,000 in 2025 (25% of compensation or annual cap, whichever is less).
- Employer makes 100% of contributions using pre-tax dollars; employees cannot contribute.
- Contributions are tax-deferred and fully vested immediately.
- Low setup and administrative costs compared to other retirement plans.
- Offers broad investment options and tax benefits similar to traditional IRAs.
Eligibility
Who Can Open a SIMPLE IRA and who is eligible for a SIMPLE IRA Plan?
As of 2025, the IRS rules outlined the following criteria to qualify for a SEP IRA
- You have worked for the employer in at least three of the previous five years.
- You must be at least 21 years old.
- You have received a minimum of $750 in compensation from the employer during the current year.
Employers may exclude the following types of employees from participating in a SEP IRA, even if they are eligible
- Employees who are nonresident aliens and not receiving any service compensation or U.S. wages from the employer.
- Employees who are covered in a union agreement that bargains for retirement benefits.
How To Open An Account
You can easily open a SEP IRA online. Choose an account provider and then follow the steps outlined by the IRS for setting up your SEP IRA.
- Draft a formal agreement either through your account provider or with IRS Form 5305-SEP.
- Inform your eligible employees about SEP IRA. Give them a copy of IRS Form 5305-SEP or provide information through your account provider.
- Establish separate SEP IRAs for each eligible employee with the account provider.
How Does SEP IRA Work?
A SEP does not come with many start-up or operating costs, unlike other employer-sponsored plans. Since many employers can contribute to their retirement at higher levels than conventional IRAs, a SEP IRA becomes an attractive option.
Also, you can set up a SEP for your self-employed business and even participate in an employer’s retirement plan if you are also employed elsewhere. SEP accounts enjoy the same tax benefits and investment options as any other traditional IRAs. Also, the same transfer and rollover rules apply.
Additionally, when you, as an employer, make a SEP IRA contribution, you receive a tax deduction for the amount contributed. With a SEP, your business doesn’t need to make annual contributions. You can decide whether or not to contribute and how much to contribute each year.
Business owners and employers are not responsible for making investment decisions. The IRA trustees assess eligible investments, and the individual employee account holder makes the investment decisions. The IRA trustee also does all the paperwork involved, including depositing contributions, filing the documents with the IRS, and sending annual statements.
What are SEP IRA Withdrawal Rules?
When you withdraw funds from your SEP after retirement, you are taxed according to your current income bracket. After reaching the age of 59 ½, you can spend the money without penalty. If you withdraw before age 59 ½, you have to pay income tax and a 10% early withdrawal penalty. However, there are specific exclusions.
- You can avoid the 10% early withdrawal penalty in the following scenarios
- Paying health insurance premiums while unemployed
- Withdrawing money as a beneficiary after the account holder’s death
- Covering qualified higher education or medical expenses
- Buying your first home (up to $10,000)
- Welcoming a new child (up to $5,000)
- Making substantially equal payments
Remember that even if you qualify for an exemption, you (or your beneficiary) will still be required to pay income taxes on any withdrawals from your SEP IRA.
What are the Pros and Cons of a SEP IRA?
| Pros | Cons |
|---|---|
| High contribution limits | Mandatory contributions |
| Easy to setup | Limited withdrawal options |
| Employer contributions to attract and retain talent | No Roth option |
| Tax-deductible contributions | Impact on the ability to contribute to other retirement accounts |
| Flexibility to choose how much to contribute each year | Need to consider other retirement plan options once your business grows |
What’s Better?
| Feature | SEP vs. Roth IRA | SEP vs. SIMPLE IRA | SEP vs. Traditional IRA |
|---|---|---|---|
| Contributions | Contributions to a SEP are tax-deductible. However, Roth IRA contributions cannot be deducted because taxes are paid before the money is deposited into the account. | SEPs can only be contributed to by employers. In contrast, employees can also contribute to SIMPLE IRAs through voluntary deferrals from their salary. | Traditional IRA payments may be tax deductible, and gains grow tax-deferred until you begin taking assets in retirement. In contrast, a SEP plan enables self-employed individuals and small company owners to contribute to their own and their workers’ retirement plans. |
| Growth and Withdrawals | A SEP IRA provides tax-deferred growth on investments. But, a Roth IRA allows for tax-free growth and withdrawals in retirement. | Not specified in the content. | Traditional IRA gains grow tax-deferred until you begin taking assets in retirement. |
| Contribution Limits | SEPs have more extensive contribution limitations ($66,000 in 2023, $69,000 in 2024 and $70,000 in 2025) than Roth IRAs ($6,500 in 2023, $7,000 in 2024 and $7,000 in 2025). | SIMPLE IRA employee contribution maximum for 2024 is $16,000 ($16,500 in 2025), with a $3,500 catch-up for individuals aged 50 and above in both years. The SEP IRA contribution maximum is $66,000 in 2023, $69,000 in 2024, and $70,000 in 2025. | Not specifically compared in the content. |
| Employee Contributions | SEPs allow you to include workers and make contributions on their behalf, but Roth IRAs do not. As a result, SEPs are better suited to enterprises with more than one employee. | Employees can also contribute to SIMPLE IRAs through voluntary deferrals from their salary. | SEP plans enable contributions to both owner and workers' plans, unlike Traditional IRAs where it is individual. |
| Suitability | Better suited to enterprises with more than one employee. | A SIMPLE IRA is a retirement savings plan like the SEP IRA for both companies and self-employed individuals. | SEP is a popular alternative for small firms. |
| Additional Notes | Are you planning your retirement and thinking about a SEP or Roth IRA? We have you covered! Explore our page on 'Roth IRA' to obtain a thorough grasp of its benefits and characteristics. | Are you split between SEP and SIMPLE IRAs as your retirement plan? Before making a selection, read our article on 'SIMPLE IRA' to have a better knowledge of the pros and concerns. | Both traditional and SEP IRAs come with separate advantages. So which one should you choose? It depends on your financial circumstances and retirement objectives. |
FAQs
Are the qualifying standards the same for all employees in a SEP plan, including the owners?
Yes, employees must fulfill the same eligibility conditions as their employer to participate in the SEP plan.
My husband and I own our own business. Must we both meet the SEP plan eligibility standards in order to receive a plan contribution?
Yes, both spouses must fulfill the employer’s SEP plan eligibility standards before receiving a plan contribution.
Is my new employee able to join our SEP plan immediately?
Yes, new workers can become eligible for the SEP plan immediately, provided they come under the employer’s qualifying conditions.
Are employer contributions to SEP taxed for employees?
No, employer contributions to the SEP are not taxed to employees. The employer’s contributions are tax-deductible for the firm but are not deemed taxable income for the employees.
If I enroll in a SEP, may I still contribute to a standard or Roth IRA?
Yes, if you join a SEP, you can continue to contribute to a Roth IRA up to the IRS contribution restrictions.
Can businesses contribute different amounts to SEP for each employee?
Yes, employers may contribute varying amounts to SEP for different employees as long as the contributions follow the SEP plan’s contribution formula or a constant proportion of income.
Can I remove funds from a SEP IRA before retirement?
Yes, you can take funds from a SEP IRA before retirement. However, you may be subject to early withdrawal penalties and taxes. It depends on your age and the reason for the withdrawal.
Can I have a 401(k) and a SEP at the same time?
Yes, you may have both a 401(k) and a SEP at the same time, provided you complete the qualifying conditions for each plan and stay under the IRS contribution limitations.
How and when may I access the funds in my SEP IRA?
When you reach the age of 59½, you can withdraw your SEP funds, which are typically taxed as ordinary income. Early withdrawals may incur fines.
Who owns SEP contributions?
The employer owns the SEP contributions until they vest, at which point the employee takes complete ownership of the contributions.
What are the filing and notification requirements for SEP?
Employers must submit Form 5305-SEP or Form 5305A-SEP with the IRS to create a SEP plan and send a copy of the plan document to each qualified employee.
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