SEP IRA

Overview of a SEP IRA

A SEP IRA (Simplified Employee Pension Plan) is a powerful retirement account used by many self-employed persons and business owners. It is particularly attractive as you can contribute up to $58,000 into it annually. That’s in comparison to a Traditional IRA, where you can only contribute up to $6,000 a year.

The SEP IRA contribution deadline is April 15th for the prior year contributions for sole proprietors and independent contractors who file their business returns on schedule C of their personal 1040 tax returns. For 2020 only, the April 15th deadline was moved to May 17, 2021. The SEP IRA contribution deadline can always be extended if the business return for the company supporting the SEP IRA is extended. For sole proprietors, that would be the personal 1040 tax returns (schedule c) which can be extended 6 months to October 15th each year. For partnerships and s-corps, their deadline is March 15th (company returns deadline) but can be extended 6 months to September 15th. As a result, it is possible for a sole proprietor who has extended their personal return to make 2020 SEP IRA contributions up until October 15, 2021.

SEP IRA Account

Benefits

2021 Contribution Limit

Qualifications

Withdrawals/Distributions

Cannot Exceed:
25% of compensation (up
to $58,000.00)
An employer (sole proprietors, partnerships, and corporations can set up a SEP plan.
Age 59 & under: Taxes and 10% penalty applies
Age 59 1/2 –72: Taxes apply, but no penalties
Age 72 & over: Taxes apply, and
distributions are required by law

Distribution Options

Keep in mind that the money contributed to a SEP IRA is an “employer contribution.” This means that the money comes from the company and is set at a maximum of 25% of the employee’s wage. So, if you are the only employee and you make $100,000 that year, the company can contribute $25,000 to the SEP IRA. For a business owner with no employees, it doesn’t really make a difference whether you pay into the SEP IRA from your company’s account or from your personal account as its all effectively your money in the end.

However, once you have employees, you are required to offer the same SEP IRA and same employer contribution to them that you offer to yourself. Now, you will likely care whether that money comes from the employee’s wages or from the company’s account.

You only need to offer the SEP IRA to “eligible employees,” and you can make employees “ineligible” if they have not worked for you for 3 years out of the prior 5 years (see IRS SEP IRA FAQs). In other words, until someone has worked for the company for at least 3 years, you do not need to offer the SEP IRA to them. For many small businesses, self-employed persons and new companies, a SEP IRA can be an excellent choice for the business owner as they may be the only eligible person who has worked for the company for 3 years. You can also restrict eligibility if an employee has not yet turned 21. This 3 year employee eligibility rule under a SEP IRA is far superior to the 1 year employee eligibility rule that would apply when using a Solo K upon hiring employees.

Videos & Articles
on SEP Accounts

Can I use a SEP IRA If I Have Employees?

A SEP IRA is a powerful retirement account used by many self-employed persons and business owners….