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Categories: General Tax Terms

Simplified Employee Pension (SEP) IRA

A Simplified Employee Pension (SEP) IRA is a type of retirement savings plan designed for self-employed individuals and small business owners. It allows employers to make tax-deductible contributions to individual retirement accounts (IRAs) set up for their employees, including themselves if they are self-employed.

Contributions to a SEP IRA are made by the employer and can be significant, allowing for up to 25% of an employee’s compensation or a maximum contribution limit, whichever is less. The funds contributed grow tax-deferred until withdrawal, typically during retirement. Employees do not contribute to the plan, making it a straightforward and low-maintenance option for retirement savings.

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Alternative Meanings:
  • Simplified Employee Pension (SEP) IRA

    Simplified Employee Pension (SEP) IRA

    A Simplified Employee Pension (SEP) IRA is a type of retirement plan that allows employers to make tax-deductible contributions on behalf of eligible employees, including themselves if they are self-employed. It is designed for small businesses and self-employed individuals, offering a streamlined way to save for retirement with minimal administrative burden.

    Employers set up a SEP IRA by creating a written agreement and funding the accounts. Contributions are made by the employer only and can vary each year, with a maximum limit set by the IRS. For 2023, the contribution limit is the lesser of 25% of an employee's compensation or $66,000. Employees can also roll over funds from other retirement accounts into a SEP IRA.

    The contributions grow tax-deferred until withdrawal, and employees can withdraw funds without penalties after reaching age 59½. However, early withdrawals may incur additional taxes. SEP IRAs are less complex than traditional retirement plans, making them an attractive option for small business owners seeking to provide retirement benefits.

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