A SEP IRA (Simplified Employee Pension) plan is a retirement savings program for businesses and their owners. SEP IRAs cover multiple businesses entities, sole employee businesses, owner-only businesses, and larger businesses with up to 100 employees.
SEP IRAs are designed similarly to Traditional IRAs in that contributions are tax-deductible, and investments grow tax-deferred until retirement, upon which distributions are taxed as income.
How SEP IRAs Work
A SEP IRA is an attractive option for many business owners because it does not have the setup and operating costs like most conventional employer-sponsored retirement plans. Many employers also set up a SEP plan to contribute to their retirement at higher amounts than a Traditional IRA allows. Workers can also start a SEP for their self-employed business even if they participate in an employer’s retirement plan at a second job.
SEP IRAs are treated similarly to Traditional IRAs for tax purposes and allow the same investment options. The same transfer and rollover rules that apply to traditional IRAs also apply to SEP IRAs. When an employer makes contributions to this retirement account, it receives a tax deduction for the amount contributed.
Learn more about the other business-backed accounts that Accuplan offers here.
How Does Accuplan Improve the SEP IRA?
Accuplan allows you to do more with a SEP IRA. Most retirement accounts, be it a Roth, Traditional, or SEP IRA, rely on stocks and bonds as the investment option. The IRS allows many more asset types than simply stocks and bonds.
With Accuplan Benefits Services, you can set up a self-directed SEP account and invest intangible assets like real estate or gold or paper assets like private equity or loans. A self-directed retirement account allows you to take control of your retirement account and invest in what you want. With us, the possibilities are endless.
Open a SEP IRA today and begin investing with the premier self-directed IRA provider.
Contributions to SEP IRAs
Business owners prefer to contribute to a SEP retirement plan rather than a traditional retirement plan for mainly one reason, the contribution limit. A traditional IRA has an annual maximum contribution of $6,000 (increasing to $7,000 for those 50 and over). SEP IRAs have a maximum limit of almost 10x’s that amount; $57,000 annually for 2020, and $58,000 for 2021.
The catch is that SEP contributions cannot exceed the lesser of either:
- a) 25% of your total compensation
- or b), $57,000 in 2020 or $58,000 in 2021, whichever option is less
Important to note that 25% of compensation is also the limit for employer contributions to eligible employee accounts. To calculate what 25% of compensation amounts to, the limit is limited to $285,000 in 2020 and $290,000 in 2021.
Unlike traditional retirement accounts, there isn’t a catch-up contribution at age 50+ for SEP IRAs.
SEP Account Advantages Include
Tax-deductions – Contributions to SEP retirement accounts are tax-deductible to the company, and the company pays no taxes on the earnings inside those SEP IRAs. No IRS filings are required from the company.
No age limit – SEP plans allow company contributions for employees who are older than age 70 1⁄2.
Low cost – This account type is easier and less expensive to set up and operate than other company retirement plans, all while being much more powerful and flexible.
Immediate vesting – All contributions to a SEP account are considered immediately 100% vested. The business owner and their eligible employees that participate in the plan must first establish a Traditional IRA, from there, the employer deposits contributions made into the SEP IRA.
SEP IRA Rules for Eligibility
Any individual can open a SEP account and make contributions if the eligibility requirements are met. As long as the owner employs individuals that the IRS deems eligible, the business owner must contribute to the retirement account on their behalf. Those contributions must be an equal percentage of compensation to the business owners.
- Eligible plan participants are over the age of 21, have worked for the business for three of the past five years, and have earned at least $600 in paid salary in the past tax year. As an example, if an employee worked for the business in 2019, 2020 and 2021, the business owner would need to make a contribution for that employee for the 2022 SEP plan year.
- If the business owner plans to contribute 10% of their salary towards their retirement, then they will also be contributing 10% towards their employee’s retirement plan.
- Eligible employees own and have control over their retirement accounts.
Due to the rule of equal contributions, most self-employed business owners find that a SEP account is best for them when they employ a few or no people.
Establishing a SEP IRA with Accuplan
- Open an account with Accuplan here
- Execute a Written Agreement that the SEP will provide benefits to all eligible employees
- Provide employees with all the information and specifics about the agreement
- Set up an IRA account for each employee
- The Written Agreement
According to the IRS, this agreement will include the name of the employer, the requirements for participation, the signature of the responsible official, and a definite allocation formula.
The IRS has a model SEP plan document, Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement PDF. Note that this form is not filed with the IRS.
Frequently Asked Questions
Self-employed individuals or small businesses structured as sole proprietorships, partnerships, C corporations, and S corporations can establish and contribute to a SEP IRA.
Employers can customize eligibility requirements within limits and can change them from year to year.
To be eligible, an employee must:
- Reached age 21
- Performed services for your business in 3 or more of the last five years
- Received at least $600 in compensation from your business during the current year
Excludable employees are those that:
- Are covered under collective bargaining agreements
- Non-resident aliens that did not earn U.S. sourced income
- Employees who receive less than $450 in compensation
The owner/employer is also considered an employee and must meet the same eligibility requirements.
For any contributions to be made, the business must include all eligible employees.
Yes, you can contribute to both a SEP IRA and either a traditional IRA or Roth IRA (presuming you meet income limit requirements) in the same year. The SEP-IRA contribution may impact the deductibility of traditional IRA contributions.
The maximum contribution is 25% of compensation. The definition of compensation differs with the business structure. All eligible employees must receive the same percentage of compensation.