What Is a Simplified Employee Pension Plan? How SEP IRAs Work
A Simplified Employee Pension IRA (SEP IRA) is a traditional IRA for self-employed people and small-business owners.
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What is a SEP IRA?
A SEP IRA (simplified employee pension) is a type of individual retirement plan that helps business owners and self-employed individuals save for retirement. It's similar to a traditional IRA in that contributions are tax-deductible for the business. Investments also grow tax-deferred until retirement, when distributions are taxed as income.
Need to back up? How traditional IRAs work
SEP IRA contribution limits 2024 and 2025
In 2024, the SEP IRA contribution limit is 25% of compensation or $69,000, whichever is less. The 25% limit is also the maximum you can contribute for each eligible employee. The amount of compensation you can use to calculate the 25% limit is $345,000.
Employer contributions need to be made by the due date, including extensions, of your federal income tax return. This means if you filed for an extension this year, you have until October 25, 2025, to make a contribution for the 2024 tax year.
In 2025, the SEP IRA contribution limit is the lesser of $70,000 or 25% of compensation. The amount of compensation you can use to calculate the 25% limit is $350,000. There's no catch-up contribution at age 50 and older for SEP IRAs.
SEP IRA rules: Who is eligible?
Generally, SEP IRAs are best for self-employed people or small-business owners with few or no employees.
Here's why: If you have employees whom the IRS considers eligible participants in your plan, you must contribute on their behalf, and those contributions must be an equal percentage of compensation to your own.
Eligible participants are employees who are 21 or older, have worked for you for at least three of the past five years, and have made a minimum of $750. For example, if an employee worked for you in 2022, 2023 and 2024 and made $850, you would need to make a contribution for them for the 2025 plan year.
If you want to stash away 15% of your compensation for yourself, you must also contribute 15% of that employee's compensation to their plan. Note that this is just an example — SEP IRAs are subject to contribution limits listed above.
Employees own and control their own accounts.
Because of that rule requiring equal contributions as a percentage of compensation, a SEP IRA is generally best for self-employed people or small-business owners with few or no employees.
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How does a SEP IRA work? The pros and cons
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How do I open a SEP IRA?
It's easy to open a SEP IRA account online. The first step is to choose an account provider. Then, the IRS outlines three steps for setting up your SEP IRA:
Create a formal written agreement. You can do this with IRS Form 5305-SEP or through your account provider.
Give eligible employees information about the SEP IRA. You can give them a copy of IRS Form 5305-SEP or get similar information through your account provider.
Set up separate SEP IRAs for each eligible employee with the account provider.
How do I invest my SEP IRA?
Once you’ve opened the account, you can choose from the investments your account provider offers. The selection typically includes stocks, bonds and mutual funds. (It's possible to open an IRA at a bank, but generally you'll be limited to investing in certificates of deposit, which usually offer a lower return than a diversified group of stocks and bonds.)
Once the account is open and funded, consider investing it according to your age, planned retirement age, and risk tolerance. If you have a fairly strong stomach for market swings and a long time until retirement, think about swaying your investment selection toward stocks, specifically stock index funds, which track a segment of the market and hold a diverse mix of stocks within that segment.
The less time you have until retirement — and the less patience you have for a market downturn — the more you might want to allocate toward bonds and bond funds. You can also buy index funds for bonds.
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SEP IRA vs. Roth IRA
The Secure 2.0 Act created a Roth version of the SEP IRA, which was previously unavailable. Note that not all SEP IRA providers offer this option.
This means that you may need to choose between a traditional SEP IRA, a Roth SEP IRA or an individual Roth IRA. The main difference between a traditional SEP IRA and a Roth IRA (or a Roth SEP IRA) is that traditional SEP IRAs offer tax-deferred growth on your investments, while Roths give you tax-free growth and withdrawals in retirement.
Contributions to traditional SEP IRAs are tax deductible. You can't deduct contributions to a Roth account, because you already paid taxes on the money before adding it to your account.
Both traditional and Roth SEP IRAs also have higher contribution limits (up to $69,000 in 2024, or $70,000 in 2025) than individual Roth IRAs ($7,000 in 2024 or 2025).
SIMPLE IRA vs. SEP IRA
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a retirement savings plan for employers and self-employed people. Some of the eligibility requirements include having no more than 100 employees who earned at least $5,000 in the previous year. The main difference between a SIMPLE IRA and a SEP IRA is that only employers are allowed to contribute to SEP IRAs, but employees can contribute to SIMPLE IRAs through their paycheck via elective deferrals.
Another core difference is that the SIMPLE IRA employee contribution limit is much smaller than a SEP IRA's.
Frequently asked questions
Can I have a SEP IRA and a Roth IRA?
You can combine a SEP IRA with a traditional or Roth IRA. If you’re an employee who is covered by a SEP IRA, employer contributions don’t reduce the amount you can contribute to an IRA for yourself, but the amount of your traditional IRA contribution that you can deduct may be reduced at certain higher income levels, due to the combination of both plans. (For more information, see the IRA contribution limits.)
Can I contribute to both a SEP IRA and a traditional IRA?
The government places no restrictions on contributing to both a SEP IRA and a traditional IRA in the same year. Also note, you do not need to reduce your SEP IRA contribution to also contribute to a traditional IRA.
However, there are income limits to deducting contributions to a traditional IRA, and it also depends on your filing status and whether you already have a workplace retirement account.
If you exceed the income limits and aren't eligible for a traditional IRA deduction, you could roll the funds from your traditional IRA into a Roth IRA using the backdoor Roth method. By rolling over your funds into a Roth, you can enjoy tax-free distributions, assuming you wait until your full retirement age.
The catch is that the government requires all rollovers from traditional to Roth IRAs to be done on a pro-rata basis. This means that if you have an account with a $56,000 SEP IRA contribution and a $6,000 nondeductible traditional IRA contribution, you cannot choose to just rollover the $6,000. If you rolled over $6,000 (9.7% of all of the $62,000 total), the government would treat that like you were rolling over $5,418 (or 9.7%) of the SEP and $582 (also 9.7%) of the non-deductible traditional IRA, which is not what you intended at all. Unfortunately, you don’t have the option of designating which dollars are getting rolled over.
The only way to rollover the full non-deductible amount into a Roth IRA would be to rollover all of your traditional assets (this includes the full value of your SEP IRA and other traditional IRA accounts)
Is there a deadline to set up and contribute to a SEP IRA?
Yes, the deadline to set up and contribute to a SEP IRA is the tax filing deadline, including extensions. This means that you have until October 15th to contribute for the previous tax year.