What is a Sep IRA?

A SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) is an employer-funded retirement plan that lets self-employed individuals and small business owners contribute up to 25% of eligible compensation or $69,000 for 2024, whichever is less, into traditional IRA accounts for themselves and any eligible employees. Contributions are tax-deductible for the business and grow tax-deferred until withdrawal in retirement.

Section 01

How does a SEP IRA work mechanically?

The employer makes all contributions—employees cannot contribute their own money. The business opens separate SEP IRA accounts at a financial institution for each eligible employee, and the employer deposits contributions directly into these accounts.

Section 02

What are the 2024 contribution limits and calculation method?

For 2024, the maximum SEP IRA contribution is the lesser of 25% of compensation or $69,000. Self-employed individuals calculate this differently than W-2 employees because you must account for self-employment tax.

Section 03

Who qualifies as an eligible employee you must cover?

Key takeaway

Federal law requires you to include any employee who meets three criteria: age 21 or older, worked for you in at least three of the past five years, and received at least $750 in compensation from your business during 2024 (this threshold adjusts annually). You cannot exclude employees based on job title, hours worked, or full-time versus part-time status once they meet these thresholds.

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Section 01

How does a SEP IRA differ from a Solo 401(k)?

A Solo 401(k) allows both employee deferrals (up to $23,000 in 2024, or $30,500 if age 50+) and employer profit-sharing contributions, potentially letting you save more if your income is below $200,000. SEP IRAs only accept employer contributions with no employee deferral option.

Section 02

When does choosing a SEP IRA make practical sense?

SEP IRAs suit business owners who want simple administration, have fluctuating income, or employ part-time workers who rarely meet the three-year eligibility threshold. You can establish and fund a SEP IRA up until your tax filing deadline including extensions—so until October 15, 2026 for your 2024 tax year—making it useful for year-end tax planning.

Section 03

What are the tax treatment and withdrawal rules?

Key takeaway

Contributions reduce your business taxable income in the year made, and investment growth is tax-deferred. Withdrawals follow traditional IRA rules: ordinary income tax applies to all distributions, and a 10% penalty applies to withdrawals before age 59½ unless an exception applies (disability, first home purchase up to $10,000, qualified education expenses).

Section 04

FAQ

Can I contribute to both a SEP IRA and a traditional IRA in the same year?

Yes, but your SEP IRA contributions do not reduce your traditional IRA contribution limit. You can still contribute up to $7,000 ($8,000 if 50+) to a traditional or Roth IRA for 2024.

Do I have to contribute to my SEP IRA every year?

No. SEP IRA contributions are flexible and entirely optional each year.

Can I convert my SEP IRA to a Roth IRA?

Key takeaway

Yes. SEP IRA funds can be converted to a Roth IRA through a Roth conversion, but you will owe ordinary income tax on the converted amount in the year of conversion.

What happens to employee SEP IRA accounts if they leave my company?

The account belongs to the employee permanently. When they leave, they keep 100% of all contributions and earnings.

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Retirement planning from saving through withdrawals

Retirement planning starts with expected spending, current savings, future contributions, and a realistic range of retirement dates. Workplace benefits such as a 401k plan or pension should be evaluated alongside an individual retirement account and taxable savings. Account tax treatment matters, but so do fees, investment choices, withdrawal restrictions, beneficiary designations, employer matching, and the current rules that apply to contributions and distributions.

As retirement approaches, review income sources, health coverage, taxes, debt, housing, and how withdrawals may respond to market changes. Full retirement age affects Social Security calculations but does not set a mandatory retirement date. An annuity may provide contractual payments, although terms and costs vary. Estate planning should address beneficiary forms, powers of attorney, health directives, property ownership, and legal documents appropriate to the household and governing state law.

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