Is the SEP IRA the Best Retirement Plan for Your Business?
Presented by David Berman
As a self-employed individual or small business owner, you have the ability to establish a simple and cost-effective
retirement plan for you and your employees. Several options are available, but one you may want
to consider is the simplified employee pension (SEP) IRA. This plan type is an attractive choice for self-employed
individuals and small business owners who want to maximize their retirement contributions.
What Is a SEP IRA?
A SEP IRA is an employer-sponsored IRA set up for employees. Contributions are made by the employer
only, though employees may be able to make separate traditional IRA contributions into the account.
Who Can Set Up a SEP IRA?
This type of IRA is suitable for corporations, sole proprietors, partnerships, nonprofit entities, and anyone
with a side business in addition to a full-time job.
Features of a SEP IRA
- SEP IRAs are low-cost plans that are easy to establish and maintain because there are minimal
IRS filing requirements and no annual compliance tests. - Contributions do not need to be made every year; however, when contributions are made, the
same percentage of compensation must be made for every eligible employee. - Employers must make the plan available to employees who have reached age 21, worked three of
the previous five years (nonsequential), and earned at least $800 in compensation in the prior year. - Employer contributions may be tax deductible for the employer.
- An employee cannot make salary deferrals to a SEP IRA because the plan is employer
sponsored. But employees can make traditional IRA contributions to the account if they choose
not to open a separate traditional IRA. There are advantages and disadvantages to doing this;
please consult your financial advisor for more details.
Maximum Annual Contribution Limits and Rules
Employer contributions are based on the first $360,000 for 2026 and cannot exceed the lesser of:
- 25 percent of the employee’s W-2 compensation (or 20 percent for a sole proprietor filing
Schedule C) or - $72,000 for 2026
Example: If an employee earned $70,000 in a year, as reported on their W-2, 25 percent of their pay
would be $17,500. The employer could contribute up to $17,500 into the SEP IRA for this employee.
SEP IRA contributions do not affect the aggregate salary deferral limit, assuming the employers
are different.
Example: If a company employee participated in the company’s 401(k) but also had their own small
business with a SEP IRA, they could max out the contributions to each. If the business owners are the
same, however, total employer/employee contributions cannot exceed the limit set by the IRS annually.
The deadline to establish and contribute to a SEP IRA is the employer’s tax-filing deadline, including a
six-month extension period, if one is filed. A sole proprietor with a filing deadline for the 2025 tax year of
April 15, 2026, has until October 15, 2026, to open and contribute to a SEP IRA if an extension is filed.
An S corporation with a filing extension would have until September 15 because its tax-filing deadline is
March 15.
Distribution Rules
SEP IRA distribution rules are the same as traditional IRA rules. Distributions are taxed at current
income tax rates in the year of distribution. If the employee is younger than 59½, the 10 percent
premature distribution penalty may apply. Exceptions to the premature penalty are as follows:
- Reaching retirement age of 59½
- Death of participant
- Disability of participant
- Qualified higher-education expenses
- Qualified first-time home purchase (up to $10,000 per lifetime)
- Unreimbursed medical expenses (more than 10 percent of adjusted gross income; 10 percent if
younger than 65) - Health insurance premiums paid while unemployed
- Series of substantially equal periodic payments (e.g., SEPP or 72(t) plan)
For employees who reached their RMD age, required minimum distributions must be taken annually, even
if the employee is still working.*
Getting Started
Because paperwork requirements vary by institution, it’s important to consult a financial advisor if you wish
to establish a SEP IRA. Generally, an adoption agreement and IRS Form 5305 are required. A SEP IRA
must be established before your business’s tax-filing deadline for that year, including extensions.
Whether you’re looking to maximize your retirement savings or help your employees save for theirs, a SEP
IRA could be a great retirement plan choice. With the time and effort you’ll save on this simple and easy-to-maintain
plan, you can focus on what matters most—growing your business!
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although
we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional
tax advisor, or lawyer.
*For individuals born before July 1, 1949, RMDs must begin at age 70½. For individuals born on or between July 1, 1949, and
December 31, 1950, RMDs must begin at age 72. For individuals born on or between January 1, 1951 and December 31, 1959, RMDs
must begin at age 73. For individuals born on or after January 1, 1960, RMDs must begin at age 75.