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What Is a SEP IRA?

What Is a SEP IRA?

April 18, 2021
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What Is a SEP IRA?

A Simplified Employee Pension (SEP) IRA is a strategy that allows a small business to contribute the lesser of 25% or the annual SEP contribution limit for the year ($58,000 for 2021) into a retirement account. Unlike its cousins, the SIMPLE IRA and the 401(k), a SEP IRA's contributions are employer-only. In other words, employees cannot contribute to the plan, only the employer. The good news is the employer's contributions are tax-deductible for the business. A SEP IRA can be an excellent strategy for employers who want to reduce the business' tax liability and give back to their employees. 

A SEP IRA is less flexible than a 401k. For example, there is no option to make a Roth contribution to a SEP IRA. There is also no option to place a vesting schedule. SEP IRA's are flexible; you don't have to contribute every year. When an employer does make contributions, an equal deferral percentage has to go to all eligible employees. There are no catch-up contributions for SEP IRAs. SEP IRA's are generally less expensive to step up than 401(k) plans. 

You must make contributions for a given year before you file taxes for that year. For example, if it's 2021 and you have not filed taxes for 2020 yet, you can contribute for 2020 as long as it's before you file taxes for 2020.  



Here are the most restrictions you can put on an employee's eligibility for a SEP IRA. These eligibility rules are directly from the IRS website. You can be less restrictive. 

The employee: 

  • "Has reached age 21
  • Has worked for the employer in at least 3 of the last 5 years
  • Received at least $650 in compensation for 2021 from the employer during the year ($600 for 2019 and for 2020)"

(IRS, 2021)

Should I Set Up a SEP IRA

Should you set up a SEP IRA? As always, that depends on a few things. It usually makes sense to talk to a professional before deciding what to do. Some of the factors to consider include:

  • Do you want a plan that allows for employer contributions to vest or not?
  • Do you have time, energy, and the money to set up and manage a robust employer-sponsored retirement plan, or do you need something more simple?
  • How much money are you able to contribute to a retirement plan?
  • Do you need significant tax deductions or not?

This article gives a high-level view of the SEP IRA. When you establish a SEP IRA, there is a simple adoption agreement and Form 5305-SEP you will need to complete. If you need help understanding if a SEP IRA applies to your situation, please reach out to us. We are happy to help.


IRS. (2021, April 3). Operating a SEP. Retrieved from

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