SEP IRA FAQs
We have provided these FAQs as general guidance. IRAs of all types are subject to IRS eligibility, requirements and restrictions. Talk with your investment and tax advisors about your particular circumstances. Please see IRS Guidelines for information for the current tax year.
A SEP IRA is primarily designed for self-employed, sole proprietors, small businesses, partnerships, C corporations and S corporations.
Each can establish and contribute to a SEP IRA for themselves or for their employees. A SEP IRA can be considered a traditional IRA with some additional perks, such as the ability to receive employer contributions into the account.
Generally, an individual is an eligible employee if:
- They are at least 21 years or older
- Has worked at least 3 of the last five years for the same employer
- Has received a minimum of $600 in compensation from the employer during the current year
- Please see the IRS Guidelines for current requirements.
Employers can exclude certain employees and have restrictions on the plan as long as the rules are not more restrictive than the IRS rules. For example, employees that:
Are covered under collective bargaining agreements
Non-resident aliens that did not earn U.S. sourced income
Employees who receive less than a certain amount in compensation
Yes. The owner/employer is also considered an employee and must meet the same eligibility requirements for SEP.
The annual contribution limits into a SEP account are significantly higher than the traditional IRAs. Many employers set up a SEP plan to be able to contribute to their own retirement at higher levels than a traditional IRA would allow.
All eligible employees must receive the same percentage of their compensation.
No. Neither the employer or a business is locked into an annual contribution and therefore has the flexibility to decide whether or not to contribute or how much to contribute. This amount can vary each year.
The employer is not responsible for making investment decisions. Instead, the IRA trustee determines eligible investments, and the individual employee account owners make specific investment decisions. The trustee also deposits contributions, sends annual statements, and files all required documents with the IRS.
Yes. Each year, the contributions you make before the tax filing deadline can be claimed for tax benefits on your tax returns for that year.
Unfortunately, no.
SEP doesn’t offer a Roth version of an IRA. This means that you can’t opt to pay taxes on contributions now and take distributions tax-free in retirement, as you can do by choosing a Roth IRA.
Yes. You may do so if you are eligible to contribute to both types.
Yes, you can contribute to both a SEP IRA and either a traditional IRA or Roth IRA as long as you meet the income limit requirements in that year.
The rules for withdrawal for a SEP are the same as for a Traditional IRA, meaning money can be withdrawn at any time. However a 10% early withdrawal penalty may apply if you are under the age of 59 ½. There are some exceptions. Talk with your tax advisor about your individual circumstances.
Minimum distributions must be taken at age 72.
An SEP IRA is much like a Traditional IRA in that the contributions are tax-deductible, and investments grow tax-deferred. Tax deferred means that tax is collected when a distribution, which is considered income, is taken during retirement.
There may be fees depending upon which Asset Management Company or Brokerage firm you choose to set up your SEP IRA. Common charges may include start-up fees, annual maintenance fees, fees for changing investments or withdrawing money. Many companies offer a lot of fee-free options. Please research and contact the company before opening up an account for more details.
Employees are responsible for opening their own SEP IRA accounts and providing the account number to the employer.
