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What is a SEP IRA?

 A Simplified Employee Pension (SEP) IRA is a retirement savings plan designed for self-employed individuals and small business owners. It allows employers to make tax-deferred contributions to their employees’ retirement accounts—and to their own.

SEP IRAs are known for their simplicity, flexibility, and low administrative costs, making them an attractive option for businesses with variable income.

Key Features of a SEP IRA:

1. Employer Contributions Only:

   • Only the employer can contribute to a SEP IRA, and contributions are made directly into each eligible employee's IRA. The employer can contribute up to 25% of the employee’s compensation or $69,000 (whichever is less in 2024), with the flexibility to adjust the amount each year based on business performance.

   • In 2025, the employer may contribute up to $70,000

2. Employee Eligibility:
   Employees are eligible to participate if they meet the following requirements:

   • They are at least 21 years old.

   • They have worked for the employer for at least 3 of the last 5 years.

   • They have earned at least $750 in compensation during the year (for 2024).

3. Flexible Contributions:
   Employers are not obligated to contribute every year, which provides flexibility for businesses with fluctuating profits. Contributions are tax-deductible for the employer, which can help reduce the business’s taxable income.

4. Tax Benefits:
   Employer contributions to SEP IRAs are tax-deductible, reducing the employer’s taxable income for the year. Employees do not pay taxes on the contributions until they withdraw the funds in retirement.

5. Investment Control:
   Employees have control over how their funds are invested within their SEP IRA, giving them the ability to choose their preferred investment options (stocks, bonds, mutual funds, etc.).