Frequently Asked Questions
Who can establish a SEP IRA?
Any employer can establish a SEP IRA, including sole proprietors, partnerships, and corporations. It's most commonly used by self-employed individuals and small businesses with few or no employees. You must cover all eligible employees (age 21+, worked 3 of last 5 years, earned at least $750 in 2024) with equal contribution percentages. Sole proprietors with no employees have the most flexibility.
What are the SEP IRA contribution limits?
2024 limits: Up to 25% of compensation or $69,000, whichever is less. For self-employed individuals, the effective rate is approximately 20% of net self-employment income after subtracting 1/2 of self-employment tax. No catch-up contributions for those 50+ (unlike regular IRAs and 401ks). Contributions must be made by employer only—employees cannot contribute.
How are SEP IRA contributions calculated?
For employees: Up to 25% of W-2 wages. For self-employed: Contribution = Net earnings - 1/2 SE tax - SEP contribution. This creates a circular calculation. Simplified: Effective rate is approximately 20% of net self-employment income. For example, $100,000 net income minus ~$7,065 (1/2 SE tax) = ~$92,935 × 20% = ~$18,587 maximum contribution.
When is the SEP IRA deadline?
You can establish and contribute to a SEP IRA until the tax filing deadline for your business, including extensions. For sole proprietors: April 15 (or October 15 with extension). For corporations: March 15 (or September 15 with extension). This flexibility allows you to determine your contribution after knowing your full-year business performance.
Are SEP IRA contributions tax-deductible?
Yes, contributions are 100% tax-deductible as a business expense. For self-employed individuals, the deduction reduces both income tax and self-employment tax. For corporations, contributions reduce corporate taxable income. The deduction is taken on your business tax return (Schedule C, 1120-S, or 1065), not as an IRA deduction on your personal return.
Can I have both SEP IRA and Traditional IRA?
Yes, you can contribute to both. However, your Traditional IRA deduction may be limited based on income if you have a workplace retirement plan (which includes SEP IRA). 2024 phase-out: $77,000-$87,000 (single) or $123,000-$143,000 (married filing jointly). You can always make non-deductible Traditional IRA contributions regardless of income.
What if I have employees?
If you have eligible employees, you must contribute the same percentage of compensation for all of them as you do for yourself. This can become expensive if you have many employees. Consider Simple IRA or 401k if you want employees to contribute or want different contribution formulas. Employees are always 100% vested immediately in SEP IRA contributions.
Should I choose SEP IRA or Solo 401k?
Choose SEP IRA for: Simplicity, no annual reporting (Form 5500), flexible contributions until tax deadline, no Roth option needed. Choose Solo 401k for: Higher potential contributions at lower income levels ($23,000 employee deferral + 25% employer), Roth option, ability to borrow from plan, catch-up contributions at 50+. Many start with SEP then switch to Solo 401k as income grows.
Can I contribute to SEP IRA and 401k?
If you have both a SEP IRA from self-employment and a 401k from a day job, contribution limits apply separately to each employer. However, if you're contributing as employee to both, your total employee deferrals across all plans can't exceed $23,000 (2024). SEP IRA employer contributions don't count against 401k deferral limits.
How do I open a SEP IRA?
Process: 1) Choose a provider (brokerage firms like Fidelity, Vanguard, Schwab offer SEP IRAs), 2) Complete IRS Form 5305-SEP (Simplified Employee Pension Agreement), 3) Open SEP IRA accounts for yourself and any eligible employees, 4) Make contributions by tax deadline. No IRS filing or annual reporting required, making SEP the simplest business retirement plan.
What can I invest in a SEP IRA?
Same investments as Traditional IRA: stocks, bonds, mutual funds, ETFs, CDs, money market funds. Most providers offer wide investment selections. Target-date funds are simplest. Index funds offer diversification at low cost. Unlike employer 401ks with limited menus, SEP IRAs typically offer thousands of investment options. Choose based on your risk tolerance and timeline.
When can I withdraw from SEP IRA?
Same rules as Traditional IRA: penalty-free withdrawals begin at age 59½. Early withdrawals face 10% penalty plus ordinary income tax. Required minimum distributions (RMDs) start at age 73. Exceptions for early withdrawal: disability, first-time home purchase ($10,000 limit), higher education expenses, unreimbursed medical expenses, health insurance premiums while unemployed, substantially equal periodic payments.