Comparing SEP to Other IRA Options

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If you’re self-employed, you may be wondering what options you have to save for retirement. The good news is that there are a few different self-employed IRAs that small business owners can take advantage of depending on their need— SIMPLE IRA, Individual 401(k) and, the SEP IRA. Figuring out the best option for you and your retirement goals can be a challenge, but we got you covered.

One option many of our clients choose to open is a SEP IRA. They’re easy to set up and maintain, with no reporting requirements and adjustable contribution limits. This flexibility is exactly what many small business owners or self-employed individuals are looking for in a retirement plan and we can help you get one started. Here's everything you need to know about SEPs.

The Benefits of Self-Directed SEP IRA

A Simplified Employee Pension (SEP) account is an IRA for small business owners with one or more employees or anyone with independent (self-employed individual) income. There are many reasons our clients open SEP IRAs for their business. Aside from the overall ease of plan management, you can vary the contribution amount depending on the flow of business.

For example, say a construction company opens a SEP plan for their employees. They chose this plan due to the cyclical nature of the industry, so in good years they can contribute more but in off years reduce the percentage. With a self-directed SEP, employee John Doe can decide where and what to invest in— though he cannot make any additional contributions as an employee, the account is solely owned by him and is under his control.

The neat thing about a self-directed SEP IRA with IRAR is that the participants can invest in a wide variety of investment types. The self-directed SEP IRA has all the same limits and rules as a regular SEP but allows investments in alternative assets. The higher contribution limits allow you to invest in alternative assets (like real estate) faster.

SEP Plan Contribution Limits

SEP IRA contributions are made by the employer, pre-tax. That means an up-front tax break or tax-deferred savings for your business. The employee doesn't pay taxes until they withdraw the money from the account during retirement. Another big advantage of a SEP IRA is the higher contribution limit.

In 2023, the SEP contribution limit is up to 25% of individual compensation, with a maximum of $66,000. That amount increased for 2024 to $69,000. 

The annual contributions allowed in a SEP are much higher compared to a maximum contributions allowed in a Traditional or Roth IRA. The SEP-IRA doesn’t allow for catch-up contributions at age 50 like other IRAs because the employer makes the contributions to the SEP, not the employee.

Since the employer is making the contributions, the amounts are related to the employee's salary or wages. This means that everyone’s contribution is the same percentage of their individual salary. 

For example, if you make a 25% SEP IRA contribution to yourself as the owner, you also must make a 25% employer contribution for your employees who qualify to participate in the plan. Contributions must be made in cash; you cannot contribute property.

Another important thing to note is that an employer contribution to a SEP-IRA won't affect the amount an employee can contribute to a Roth IRA or a Traditional IRA. However, it may prevent the employee from receiving a tax deduction for contributions to a Traditional IRA.

Who Qualifies for a SEP IRA?

Not all employees may be eligible to participate in the SEP IRA. Employees must be included in the SEP IRA if they:

  • Attained age 21;
  • Worked for your business in at least 3 of the last 5 years;
  • Received at least $750 in compensation for 2023 from your business.

You can decide to have requirements for eligibility that are less restrictive (i.e. attained age 18), but not more restrictive than what is listed above.

Also, you can exclude employees covered by a union agreement whose retirement benefits were bargained for in good faith by the employees' union.

How to Set Up a SEP IRA

You can set up a SEP retirement plan for all eligible employees by executing a formal written agreement, form 5305-SEP that you get from your IRA custodian when you open the account. You must give each eligible employee a copy of this form. The SEP isn't considered adopted until you give each employee this information

An individual retirement account (IRA) is established for each employee by the custodian for the employer to make contributions. IRAR can help you establish your SEP and employees’ individual retirement accounts. Once the accounts are set up, you will send the contributions directly to IRAR.

Set up and Contribution Deadline

Unlike the Traditional IRA or Roth IRA for individuals (which have a specific contribution deadline, generally April 15), SEPs are different. The deadline for establishing and contributing to a SEP IRA depends on when your business files its income tax returns.

The deadline for setting up a SEP IRA is April 15 or your business' tax-filing deadline including extensions. 

SEP IRA Distributions

Distributions from a self-directed SEP IRA work like any other tax-deferred IRA. Distributions are treated as ordinary income and subject to income tax (and if you are under the age of 59 ½, early withdrawal penalties) when a withdrawal is made by participants.

Required Minimum Distribution (RMD) rules apply to SEPs. Due to changes made by the SECURE Act in 2019, if your 70th birthday is July 1, 2019, or later, you do not have to take distributions until you reach age 73.

SEP IRA Rules And Important Things to Remember

  • The IRS has a handy checklist for business owners to use to determine their eligibility for a SEP IRA. You can use this to help you make sure your plan is compliant with IRS regulations.
  • You must contribute the same percentage for all employees, including yourself. If the business contributes 20% of your income to your SEP account, it must also contribute 20% of each individual employee’s income to their personal SEP accounts.
  • The SEP IRA cannot issue a loan to the account holders, and the assets cannot be used as collateral.
  • SEP IRAs do not allow catch-up contributions, unlike some other accounts. The maximum contribution is capped at 25% of an individual’s compensation (with a maximum amount of $66,000 for 2023 and $69,000 for 2024), per tax year. 
  • Employees cannot contribute any additional funds to their SEP accounts— the contribution is limited to the percentage set by the employer.
  • If an employee leaves before the end of the plan term, you must still contribute to their SEP account, even if they have already left your employ. They must receive the same percentage contribution as the rest of your employees.
  • Your business can deduct your contributions to employee SEP accounts. These are tax-deductible. The IRS has more detailed information on limits and allowances.

SEP IRAs are inexpensive, easy to set up, easy to maintain, and do not require annual IRS filings like 401(k) accounts. With a self-directed SEP, you have all those benefits plus the flexibility to invest in almost anything. Why wouldn’t you want to start saving for your retirement today?



When is the SEP IRA Contribution deadline?

The deadline to establish a SEP IRA is April 15, 2024, or the employer's tax filing deadline, including extensions. 

Who qualifies for a SEP IRA?

Small business owners with one or more employees or anyone with an independent (self-employed individual) income. This IRA allows higher contributions than a Traditional or Roth IRA.

What is a SEP IRA?

A SEP IRA or Simplified Employee Pension is a retirement plan for small businesses with one or more employees. You, the business owner count as an employee. The employee does not make contributions only the employer or company. This plan allows higher contribution limits than most IRAs.

Can an employee contribute to a SEP IRA?

No. An employee cannot contribute to a SEP IRA, only the employer. However, the employee can set up a separate individual retirement account and make contributions not to exceed the total allowed for the year.

What is the deadline to set up a SEP IRA?

You can set up a SEP IRA for your business before your business' income tax return due date (including extensions) for that year. 


Comparing SEP To Other IRA Options

What are the Maximum IRA Contribution Limits?

  • Simplified Employee Pension Individual Retirement Arrangement (SEP IRA)
  • Roth IRA

The maximum contributions you can make to an IRA can change from year to year, plan to plan, and income to income. SEP, Roth, and Simple IRAs have different rules and limits. The best plan might come down to what the average employee income is at your specific company. There are some IRAs that people with higher incomes aren’t allowed to contribute to. 

How Do SEP IRAs Work?

Simplified Employee Pensions (SEP) IRAs can be used by companies of any size. SEPs are contributed to solely by the employer. However, an employee can set up a separate IRA and make contributions to that. 

Employers may contribute up to 25% of an employee’s pay, but the contribution amount must be uniform for all employees. For example, an employer may not contribute 25% of Angela’s pay, but only 17% of John’s. 

If your business is in an industry that is cyclical in nature, the employer’s contribution amount can be adjusted for leaner times. Historically, if your industry slows down every three years, it would make sense to be able to adjust contributions to reflect times when less revenue is generated. 

Setting up a SEP IRA is quite simple. Make sure the employee qualifies for a SEP IRA. They must have worked three of the last five years and made a minimum of $750 in 2023.

Then, you would create a written agreement using form 5305-SEP from the IRS. This is provided when you open an account. Once the SEP Plan is established, you can set up individual SEPs for all eligible employees.

How Do Roth IRAs Work?

Roth IRAs are different in a few ways. Unlike a SEP IRA, employees may contribute to their Roth IRA. There are IRA income limits, however. The contribution limits vary depending on marital status and modified adjusted gross income. The ability to contribute to a Roth IRA begins phasing out at $138,000 for individuals and $218,000 for couples in 2023. 

Max Roth IRA contributions in 2023 are $6,500, but that goes up to $7,500 if you’re 50 years old or older.

Another difference is not being able to deduct Roth IRA contributions on taxes. An upside of Roth IRAs is that they offer tax-free growth throughout the life of the plan, and you can contribute to them well into your seventies.

To set up a Roth IRA, you should first determine if you are eligible. After you have established that you qualify to open a Roth IRA, you should do some research to determine where you want to open your IRA. The majority of banks and brokerages will have the appropriate paperwork (5305-R) to fill out on their websites. 

How Do SIMPLE IRAs Work?

A Savings Incentive Match Plan for Employees (SIMPLE) is a great retirement savings plan for small businesses, particularly for small businesses with 100 or fewer employees. 

Many employers like using SIMPLE IRAs because they are user-friendly, and don’t come with countless cumbersome rules, as compared to a 401(k) plan.

In 2023, individuals can contribute up to $15,500 to a SIMPLE IRA, and this amount increases to $16,000 in 2024. Additionally, employees who are 50 years old or older can make a "catch-up" contribution of $3,500.

The employer is required to contribute every year, but not the employee. To utilize SIMPLE IRAs, the company must not be using any other retirement plans. 

Eligible employees must have made $5,000 in the past two calendar years. Setting up the IRA is simple. Execute a written agreement, find the plan provider that works for you, and fill out the appropriate paperwork (5305-SIMPLE). 

When Is the Last Day to Contribute to My IRA?

Generally, the last day to contribute to an IRA is Tax Day— April 15th. You may contribute right up until Tax Day, including filing extensions. 

What Can IRAR Do for YOU?

We know that navigating financial waters can be a frustrating and daunting task. Here at IRAR, our job is to alleviate the stress of self-directing your IRA or finding the right strategy by providing you with comprehensive retirement plan education, so that when you are ready to make your choice, you will be doing so while being armed with the most up-to-date information.

We are a financial services company composed of the self-directed IRA industry’s top professionals. To learn more about who we are and what we do, visit us at

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