SEP IRA Rules & FAQs

What is a SEP IRA?

A SEP IRA (Simplified Employee Pension) is a retirement plan that is popular with many small business owners and self employed individuals. The 2023 SEP IRA contribution limit is $66,000 and the 2022 SEP IRA contribution limit is $61,000.

Who is eligible for a SEP IRA?

Sole proprietors, partnerships, incorporated and unincorporated small businesses including S and C corporations and individuals with self employment income even if they are covered by their employers retirement plan such as a 401k, 403b or 457 plan.

Who is best suited for a SEP IRA?

Employers who wish to make large tax deductible retirement plan contributions both for themselves and on behalf of their employees (who therefore receive a substantial tax free fringe benefit). This could be beneficial in attracting or retaining key employees in a competitive labor market.

Another desirable situation is a person with a sideline business with self employed income in addition to a main job which provides a retirement plan such as a 401k. Contributions can be made to a SEP IRA with self employed income even if you participate in a 401k, 403b, or 457. This is good for such individuals if their desire is to save for retirement while saving current taxes.

How are SEP IRA contributions calculated?

The employer decides at what level the plan will be funded, from 0% to 25% of compensation (0%-20% for unincorporated businesses). The contribution percentage must be the same for the employer as for the employees. Each employee has his/her own SEP IRA account and the employer pays the entire contribution. The employee receives this fringe benefit tax free and it's tax deductible for the employer. Contributions to a SEP IRA is optional each year so years can be skipped if finances dictate or implemented if profits exceed a certain threshold as an incentive to employees. Because a SEP IRA is so generous to employees it may engender employee loyalty and minimize turnover.

Which employees must be included in the plan?

All employees age 21 or older who earned $750 or more in 2023 ($650 in 2022) and have worked for the business in 3 of the past 5 years must be included in a SEP IRA plan.

When is the deadline for a SEP IRA to be established and funded?

Sole proprietorship, partnership or a LLC taxed as a sole proprietorship:

  • A SEP IRA must be established and funded by the individual's personal tax filing deadline, generally April 15th (or October 15 if an extension was filed).

S or C corporation or a LLC taxed as a corporation:

  • A SEP IRA must be established and funded by the corporate tax filing deadline, generally March 15th (or September 15 if an extension was filed).

When may the funds be withdrawn?

As with other retirement plans, the SEP IRA allows withdrawals at age 59 ½. Distributions before age 59 ½ usually incur taxes and penalties with some exceptions such as medical or educational expenses or the purchase of a home. Consult with your tax advisor to determine if you may qualify for those exceptions.

Need Help or Advice?

Eric Kuniholm Eric Kuniholm, CPWA®
Certified Private Wealth Advisor®
Beacon Capital Management Advisors

Contact me if you would like to open a SEP IRA or if you would like to learn more about the services I provide to my clients. I am registered in all 50 States.

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