What Is a SEP IRA?

What Is a SEP IRA?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A SEP IRA, or Simplified Employee Pension Individual Retirement Arrangement, is a type of retirement plan that an employer or self-employed individuals can establish. The employer is allowed a tax deduction for contributions made and employees don’t pay taxes on contributions until they start making withdrawals during retirement. The contributions are invested and can grow tax-deferred until the money is withdrawn.

The big advantage of a SEP IRA for self-employed individuals or small business owners is the higher contribution limit compared to traditional IRAs. For 2021, the limit is 25% of compensation, or $58,000, whichever is less. This can make a big difference for those who want to save more for retirement.

Related Questions

1. How does a SEP IRA work for self-employed individuals?

For self-employed individuals, a SEP IRA allows them to contribute a portion of their net earnings to their own retirement savings. The contributions are tax-deductible, reducing their taxable income for the year. The money can be invested and grows tax-deferred until it is withdrawn.

Want More Financial Tips?

Get Our Best Stuff First (for FREE)
We respect your privacy and you can unsubscribe anytime.

2. Who can contribute to a SEP IRA?

Only employers can contribute to a SEP IRA. This includes self-employed individuals, who are considered both employer and employee. Employees cannot contribute to their SEP IRAs, unlike Traditional or Roth IRAs.

3. When can you start withdrawing from a SEP IRA?

You can start withdrawing from a SEP IRA at age 59.5. If you make withdrawals before this age, you may have to pay an additional 10% in taxes as an early withdrawal penalty.

4. Is there a deadline to set up a SEP IRA?

Yes, there is a deadline to set up a SEP IRA. You can establish and fund a SEP IRA for a given tax year up until the tax filing deadline of the following year, including extensions.

5. How much can an employer contribute to a SEP IRA?

An employer can contribute up to the less of 25% of an employee’s compensation or $58,000 for 2021. Note, this limit may be adjusted annually for inflation.