Simplified Employee Pension (SEP) IRA: What is a SEP IRA?

What is a SEP IRA?

Business owners can contribute to their employees' IRAs through a Simplified Employee Pension (SEP) plan. It’s an ideal option for business owners due to its simplicity and flexibility. Only employers can contribute to a SEP IRA, and their contributions grow tax-deferred until retirement. SEP IRAs are an effective tool for saving because the contribution limitations are much higher than those of ordinary IRAs.

Why Should Business Owners Consider a SEP IRA?

The simplicity and affordability of a SEP IRA can make it a viable option for business owners. There aren't many administrative needs when setting up a SEP IRA. The employees and the employer can both save more for retirement thanks to the higher contribution limits. By offering a tax-deductible retirement account for your company, you may improve your benefits package and acquire top talent. SEP IRAs offer tremendous flexibility in that they can be formed at any time prior to the deadline for filing taxes, including extensions.

Pros of a SEP IRA

Setting up a SEP IRA is quite simple and only requires one form. You may make a tax deductible contribution up to 25% of an employee's salary as a business owner, with a $69,000 cap for 2024 tax year. Employees immediately become the owners of the money the employer contributes because they are immediately vested. There is no requirement for the employer to make an annual contribution; you are free to choose how much to contribute each year. Administrative duties are also reduced because there are no annual filing requirements.

Cons of a SEP IRA

SEP IRAs have certain drawbacks in spite of their benefits. Due to the fact SEP IRA contributions are only funded by the employer, the savings potential for employers is reduced compared to plans that allow employee funded salary deferrals. The inability of SEP IRAs to allow catch-up contributions for individuals over 50 may have an impact on the retirement savings of older workers. If a business owner-employee makes a tax-deductible contribution for themselves, they must also make a contribution to fund all of their employees SEP IRA’s. The business owner must apply the same contribution percentage rate to their employees contributions as they apply for themselves. Since the business owner must uniformly-apply the same contribution rate across the full employee census, the business owner will find it difficult to maximize their contribution without significantly increasing the company's cost to fund their employee’s contributions. 

If a business owner would like to maximize the tax-deductible retirement plan contributions in their favor, while reducing the obligation to fund their employees benefits, then they should evaluate the use of a Safe Harbor 401(k)/ Cash Balance Pension Plan. Please visit the article listed below.