What is a SEP IRA?

What is a SEP IRA?

January 02, 2024

What is a SEP IRA?

A SEP IRA is a retirement plan suitable for small businesses and self-employed individuals. It allows employers to make tax-deductible contributions for their eligible employees, including themselves.

Eligibility and Contributions

SEP IRAs are notable for their simplicity and high contribution limits. Employers can contribute up to 25% of an employee's compensation or a maximum annual amount (adjusted annually for inflation).

Benefits of SEP IRAs

For Employers:

  1. Tax Benefits: Contributions to SEP IRAs are tax-deductible, reducing the business's taxable income.
  2. Flexibility in Contributions: Employers aren't required to contribute every year, offering flexibility in financial planning.
  3. Ease of Setup and Low Maintenance: SEP IRAs are straightforward to establish and maintain, with minimal paperwork and administrative requirements.

For Employees:

  1. High Contribution Limits: SEP IRAs allow for significantly higher contributions than traditional IRAs.
  2. Tax-Deferred Growth: SEP IRA investments grow tax-deferred until retirement withdrawal.
  3. Simplified Account Management: Employees can manage their SEP IRA similarly to a traditional IRA, choosing their investments.

Setting Up a SEP IRA

  1. Choosing a Provider: The first step in establishing a SEP IRA is selecting a financial institution as the plan custodian. Look for providers with robust investment options, low fees, and excellent customer service.
  2. Creating a Written Agreement: Utilize IRS Form 5305-SEP or a similar document provided by the financial institution to formalize the plan. This agreement outlines the plan's terms, including eligibility requirements and contribution rules.
  3. Informing Employees: Once the plan is established, inform eligible employees about its details, including how and when they can participate.

Investment Choices in SEP IRAs

Although the employer makes the contributions, the SEP IRAs offer various investment options that employees can choose. Employees can choose investment options like stocks, bonds, exchange-traded funds (ETFs), and mutual funds.

Tax Implications and Withdrawal Rules

SEP IRAs offer tax-deferred growth. However, early withdrawals (before age 59½) may incur penalties and taxes. 


SEP IRAs offer a straightforward, flexible path to retirement savings for small businesses and self-employed individuals. With high contribution limits, tax advantages, and a wide range of investment options, SEP IRAs are a compelling choice for their financial future.

Want to set up the SEP IRA for your company? Schedule a FREE consultation meeting today!