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Updated: Jul 7, 2021


For self-employed individuals with no employees, or even a small family owned business with few employees, a SEP IRA (Simplified Employee Pension plan) is definitely worth considering. The main problem with other retirement plans is the lower contribution limits. The Traditional and Roth IRA deposit limits in 2020 are $6,000 ($7,000 for age 50 and up) and the SIMPLE IRA is $13,500 ($16,500 at age 50 and up), but the SEP IRA contribution limit is 25% of gross earnings, or $57,000, whichever is less. The self-employed owner must make a special calculation factoring in the deductible part of their self-employment tax. Still, this plan provides the option to contribute a larger percentage of income to retirement savings, and the contributions are tax deductible.

Items To Keep In Mind

  1. All contributions are made by the employer. 

  2. All employees must receive the same percentage of contribution based on their gross earnings.

  3. To be eligible, one must be 21 years old, must be employed three of the last five years, and have at least $600 in annual income.

  4. The employer may change the percentage each year based on profits (even to 0%) but must still give each employee that same percentage, including themselves.

  5. Employees may still contribute to their own Traditional or Roth IRAs in addition to a SEP.

  6. A distribution taken before age 59 1/2 has a 10% tax penalty, plus ordinary income tax, unless a qualified exception is met.

Simple Savings

SEP plans can be used by a variety of small businesses, like a sole proprietorship, an LLC, a partnership, and an S corporation. Also, the SEP plan is free to set up, and like the name implies is simple to open and manage compared to the more complex and extensive maintenance involved with a 401(k) or similar business retirement plan. If a small business plans on remaining small with one or just a few employees, the SEP IRA can be a great tool to utilize for retirement saving and planning. Contact us to talk about a plan that best suits your business’s needs.

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