A Simplified Employee Pension (SEP) is a retirement account that offers tax benefits for business owners and self-employed individuals.

A SEP 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 Tax deferred means that tax is collected when a distribution, which is considered income, is withdrawn in retirement.

A SEP is primarily designed to encourage small businesses to offer retirement savings programs that they may not have offered otherwise. Sole proprietors, small businesses and partnerships, C Corporations and S Corporations can establish SEP retirement investment account for themselves and/or for their employees.

Self-employed people can also open up this type of account to invest for their own retirement. 

A SEP is similar to a traditional IRA with some additional perks, such as the ability to receive employer contributions into the account. In a SEP, employees own and control their own accounts.

Eligibility Criteria for SEP IRA

As of 2021 IRS rules, an individual is an eligible employee if they:

  • Are at least 21 years or older
  • Worked at least three of the last five years for the same employer
  • Received a minimum of $600 in compensation from the employer during the current tax year

An owner/employer can also be an employee and must meet the same eligibility requirements for SEP.

Employers May Exclude Certain Employees

For example
  • Workers covered by union agreements or collective bargaining agreements
  • Non-resident aliens that did not earn U.S. sourced income
  • Employees who receive less than $450 in compensation

While the IRS allows employers to exercise certain restrictions in the eligibility criteria for their specific SEP IRA plans, it doesn’t allow them to be more restrictive than the IRS rules.

Let's Look at an Example

  • Let’s say you have an employee that worked for you in 2018, 2019 and 2020. You would contribute to their SEP plan in the 2021 plan year.
  • Let’s say you have employees that are eligible under IRS rules. Then, you must contribute on their behalf a percentage of their compensation equal to the percentage of your own that you are contributing. This means that if you want to save 10% of your own compensation from your business for your retirement, you would have to then also contribute 10% of an eligible employee’s compensation from your business to those workers SEP plans as well. Because of this rule, a SEP IRA is generally considered best for self-employed people or small-business owners with few or no employees.

Advantages of SEPs

  • Unlike many other employer-sponsored retirement accounts, a SEP is very easy to set up and has low administrative costs.
  • The annual contribution limits into a SEP account are significantly higher than the Traditional IRA. Many employers set up a SEP to be able to contribute to their own retirement at higher levels than a Traditional IRA would allow.
  • Employers may make tax-deductible and tax-deferred contributions to their employees’ SEP on their behalf.
  • An employer or business is not 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.
  • An 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.
  • Employees can start a SEP for their self-employed business even if they participate in an employer’s retirement plan at another job.
  • One major benefit of a SEP is that employer contributions are vested immediately.
  • SEP IRAs have the same investment options as Traditional IRAs. The same transfer and rollover rules also apply.

Disadvantages of SEP

  • Unlike a Traditional IRA, you may not be able to make additional catch-up contributions beyond the standard limit after age 50.
  • 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.
  • You must take the minimum distributions starting age 72, just like you have to with Traditional IRAs and 401(k)s. 
  • If you take distribution before age 59½, it will be taxed as income and will be subject to a 10% federal tax penalty, unless the reason for the early withdrawal is in line with the early withdrawal exceptions.

Ready to open an account?

To open a separately managed account, please call us at 877-417-6161.


There are three ways you can open an account and invest in Iman Fund.

1. Directly with us by mail, see the applications below.

2. Online with one of our broker partners.

3. Through your financial advisor.