SEP IRA

A SEP IRA is a retirement plan designed for business owners and self-employed individuals who want a straightforward, flexible way to save for retirement. It’s easy to set up, inexpensive to maintain and allows employers to make tax-deductible contributions to their own and their employees’ retirement accounts. Employer contributions are optional and can vary year to year, but when made, each employee generally receives the same percentage of their compensation. SEP IRAs offer higher contribution limits than traditional or Roth IRAs but do not allow employee salary deferrals or participant loans.

This plan is especially well-suited for businesses with few or no employees, and for owners who want to retain control over how much they contribute each year without the administrative burden of more complex plans.

Business eligibility

Any type of business can establish a SEP IRA — including sole proprietorships, partnerships, LLCs, corporations (S or C), nonprofits and government entities.

Employee eligibility

While employers can choose more lenient eligibility criteria, the maximum requirements are:

• Age 21 or older
• Worked for the employer during three of the past five years
• Expected to earn at least $750 in the current year

Certain individuals may be excluded, such as union employees covered by a collective bargaining agreement and non-resident aliens with no U.S. source income.

Who contributes to a SEP IRA?

Only the employer can contribute to a SEP IRA. Contributions are discretionary and may range from 0% to 25% of eligible compensation, subject to an annual dollar limit.

Contributions are immediately 100% vested and are tax-deductible for the business. Depending on plan design, employees may receive contributions on a traditional or Roth basis:

• Traditional: Contributions are excluded from income, grow tax deferred and are taxed as ordinary income when distributed.
• Roth: Contributions are taxed as regular income, grow tax free, and qualified distributions are tax-free.

For current contribution limits, visit the Annual Limits Page.

Distributions, RMDs and plan loans

Distributions from SEP IRAs follow the same rules as traditional IRAs. Early distributions (before age 59½) may incur a 10% penalty unless an exception applies.

If you elected to save in a Roth account, you will not have required minimum distributions (RMDs) as the original owner. Otherwise, you must generally begin taking required minimum distributions by April 1 the year after you turn 73.

Participant loans are not permitted under this plan.

SEP IRA deadlines

A SEP IRA must be established and funded by the employer’s tax-filing deadline, including extensions.

Key characteristics summary

See if a SEP IRA plan is the right plan for you

To understand how a SEP IRA compares to other plan types, see Workplace Retirement Plans for Business Owners.

Open a SEP IRA

Starting a SEP IRA can be a smart move for your business and your future. An Edward Jones financial advisor can help you evaluate whether a SEP IRA fits your goals and guide you through setup and investment decisions.