SEP IRA

Should you start a SEP IRA?

Business owners can make tax-deductible contributions into a SEP IRA.

The SEP IRA is easy to set up and has far less administrative tasks than a 401(k) or 403(b). Also, there is no Form 5500 filing requirement with the SEP IRA.

If you have W-2 employees, you are required to make contributions for them as well. For example, if the employer contributes 10% of their earnings into a SEP IRA as an employer contribution, the employer must contribute 10% of the salary to the SEP IRA for each W-2 employee.

The employer has the flexibility to change the company contributions on a yearly basis.

Eligibility to Contribute

If you are self-employed or a small business owner, can contribute at any age. 

SEP IRA Vesting Schedule

SEP IRA contributions are 100% vested upon the contribution.

Maximum Annual Contribution

2022:  The maximum contribution in a SEP IRA is up to 25% of your compensation or $61,000, whichever is less. If you have employees, you are required to make employer contributions for them as well. Retirement Plans FAQs regarding SEPs | Internal Revenue Service (irs.gov)

Tax-Deductible Contributions

• If you are self-employed and file your federal taxes on form Schedule C, your SEP IRA contribution is 100% tax deductible.

• Business owners can also deduct contributions for themselves and employees against their federal taxable income.

Taxation of Earnings and Withdrawals

Tax-deductible contributions and earnings are taxed as ordinary income for distributions after the age of 59 ½ years old.

What type of Investments are allowed in a SEP IRA?

Stocks, bonds, mutual funds, ETF’s, options, treasury bills & notes, CD’s

Withdrawal Penalties

The 10% IRS penalty applies on withdrawals if the distribution is before age 59½ unless an exception below applies. You can read more about this in detail in our Tax Planning section.