A Simplified Employee Pension Individual Retirement Account (SEP-IRA) is a tax-advantaged retirement plan tailored for a small business owner or self-employed professionals. Unlike other business retirement plans, it sidesteps the burden of high operational costs and maintenance, delivering a straightforward way to save for retirement as a business owner and for employees it may have. Contributions come exclusively from the employer—employee contributions aren’t allowed—offering the employer a valuable tax deduction while building a tax-advantaged retirement investment account for employees.
- Designed for small business owners or self-employed individuals
- High contribution limits
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Contributions
Eligibility 丨 Plan Entry 丨 Limits丨Employer 丨 Vesting 丨 Rollovers
In a SEP-IRA, there are no employee contributions—only the employer contributes, even in a one-person operation like a freelancer’s business. As a result, the growth of your account hinges on your employer’s contribution amounts and the performance of your chosen investments. Employers have the flexibility to adjust contributions annually at their discretion, even opting to contribute nothing in a given year if circumstances require it. When contributions are made, they must be allocated as an equal percentage of compensation across all eligible employees.
Plan Eligibility
Employees become eligible to participate in a company’s SEP-IRA once certain conditions are met. Per IRS rules, eligibility is required at a minimum when you:
- Reach age 21
- Worked for the employer in at least 3 of the last 5 years
- Received at least $750 in compensation
However, employers have the flexibility to loosen or even eliminate these requirements. For instance, they might lower the age threshold from 21 to 18 or adjust other criteria, making participation more accessible depending on the company’s policy.
Plan Entry Date
A SEP-IRA lacks a formal plan entry date, with participation determined by meeting eligibility criteria and the plan’s establishment, providing greater flexibility than plans with fixed enrollment periods. Employers must set up a SEP-IRA by their tax filing deadline—typically April 15 of the following year, or October 15 if an extension is granted—corresponding to the year for which contributions are intended. Once the plan is established, or if it already exists, employees who satisfy the eligibility requirements—whether IRS standards or the employer’s adjusted rules—can participate immediately, without delays tied to specific entry dates.
Contribution Limits
In SEP-IRA there are a contribution limits, limiting the amount an employer can contribute to your account. The maximum contribution to a SEP-IRA is the lesser of 25% of the employee’s compensation or the contributions listed below:
For 2025 Tax Year
- Contribution limit – $70,000
- Eligible compensation limit – $350,000
For 2024 Tax Year
- Contribution limit – $69,000
- Eligible compensation limit – $345,000
Important Note – For self-employed individuals, the limit adjusts to roughly 20% of net self-employment income after accounting for self-employment taxes, reflecting a slightly lower effective contribution rate. Check out this calculator (Small Business Retirement Plan Contribution Calculator).
Employer Contributions
Employers are not required to contribute to a SEP-IRA each year, granting businesses considerable funding flexibility. When contributions are made, they must reflect a uniform percentage of compensation for all eligible employees. Employers can make multiple contributions throughout the year, with a final deadline of their tax filing date—typically April 15 of the following year—or the extended deadline, around October 15, if an extension is filed. Employees don’t need to be employed on the last day of the plan year to qualify; anyone who worked during the year and meets eligibility criteria is entitled to that year’s contribution, if provided.
In some SEP-IRA plans, employees may elect to receive these contributions as either:
- Pre-tax – Contributions go in before tax. Then the account grows deferred and taxes are paid upon withdrawal. These type of contributions are typical for high-income earners that believe they will be in a lower tax bracket in retirement.
- Roth – Contribution go in after-tax (you pay tax now) and then your account grows tax-free. These contributions are typical for individuals that believe they will be in a higher tax bracket in retirement than they are today.
- If Roth contributions are select, it will be included in the employee’s gross income for the tax year in which the contributions are actually made, regardless of their treatment on the employer’s business tax return.
Note: In many instances, the SEP-IRA will not allow for Roth contributions – leaving the only option of pre-tax deferral contributions.
Vesting
Vesting refers to the process by which you gain full ownership of the contributions your employer makes to your retirement account. In a SEP-IRA, all contributions—whether pre-tax or Roth—are 100% vested immediately. This means that from the moment contributions are made, you have complete control over them. If you leave the company at any time, you retain ownership of both your employer’s contributions and any investment earnings, with no risk of forfeiture.
Rollovers: Into SEP-IRA
A rollover is a tax-free distribution of funds from one retirement plan to another eligible retirement plan, with the contribution to the second plan referred to as a “rollover contribution.” There are several compelling reasons to consider rolling funds from another retirement plan into a SEP-IRA. These include simplifying account management, accessing a broader range of investment options, and potentially benefiting from lower fees in the SEP-IRA.
Rollover Chart: Which Retirement Accounts Are Allowed To Be Rolled Into A SIMPLE IRA IRA
More on Rollovers – Individuals Can Perform a Rollover in The Following Ways:
- Direct rollover – An account holder must request instructions from their plan administrator. Typically, a check is made payable to the new 401(k) or IRA custodian (e.g., “Fidelity Investments FBO [Your Name]”) and sent directly to the new plan. No taxes are withheld from the transfer amount because the funds do not pass through the individual’s hands.
- Trustee-to-trustee transfer – The trustee or custodian of one plan transfers the rollover amount directly to the trustee or custodian of another plan. This is common for IRA-to-IRA transfers. No taxes are withheld, and the individual does not take possession of the funds.
- 60-day rollover – If a distribution from an IRA or retirement plan is paid directly to you (e.g., a check in your name), you can deposit all or a portion of it into an eligible retirement plan within 60 days. For distributions from a retirement plan like a 401(k), taxes (typically 20%) are withheld, so you’ll need to use other funds to roll over the full pre-tax amount. For IRA distributions, taxes are not automatically withheld unless requested. Note: Only one IRA-to-IRA 60-day rollover is allowed per 12-month period (this limit does not apply to direct rollovers, trustee-to-trustee transfers, or rollovers involving employer plans).
Investments
You are responsible for managing the investments inside your SEP IRA. You will need to select and invest within the investment options offered to you by the financial institution holding the account (i.e. bank, brokerage firm, etc.). Typically, these institutions will allow you to choose from a wide range of investment options including mutual funds, stocks, bonds, ETFs, CDs & money market funds. However, you can’t invest in things like collectibles, life insurance or certain real estate deals. Ultimately, the financial institution holding your SEP IRA will provide you with the investment options you are allowed to make.
Distributions
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Distribution Before 59½
Distribution After 59½
RMDs (Required Minimum Distributions)
Rollovers Out: From SEP-IRA
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