By T.J. Porter, WCI Contributor

Saving for retirement is one of the most important parts of planning for your financial future. While the basics are easy—spend less than you make and set aside extra cash for when you’re ready to stop work—there are plenty of things you can do to make your money go further. One thing you can do to make the most of your retirement savings is to open a retirement account, possibly a SEP-IRA in the right circumstances. Retirement accounts offer tax benefits to people who use them to save for retirement. Some retirement accounts can be opened by anyone while others are offered as an employee benefit by businesses.

Here's more information on a SEP-IRA, what it is, and who can open an account.


What Is a SEP-IRA?

A Simplified Employee Pension Individual Retirement Account (SEP-IRA) is a type of retirement account that is available to small businesses. Employers can open SEP-IRAs for their employees as an employee benefit.

Unlike some other retirement accounts, employees can’t contribute to their SEP-IRAs. All contributions come from the employer. Employers can add money to their employees’ retirement accounts as a form of additional compensation.


How Does a SEP-IRA Work?

A business of any size can open a SEP-IRA for its employees. Whether you are self-employed or employ thousands of others, you can open an account. SEP-IRAs are easier to set up and run than some other retirement accounts, so they’re popular for small businesses.

SEP-IRAs, like other retirement accounts, offer incentives for retirement. While employees can’t contribute money to them, they are immediately vested in their SEP-IRAs, meaning any money added to the account immediately becomes theirs. They do not need to pay taxes on the contributions when they’re received. Instead, they pay taxes when they withdraw money from the account while in retirement.

Employers who make contributions to a SEP-IRA on their employee’s behalf can deduct those contributions as a business expense, reducing their own taxes.

Like other retirement accounts, withdrawals from SEP-IRAs are restricted. If someone withdraws money before they turn 59 ½, they’ll incur a 10% penalty on the withdrawals in addition to any tax they owe.


SEP-IRA Contribution Limits

Employees are not allowed to contribute to their SEP-IRA, so contributions can only be made by employers. The employer is limited in how much they can contribute based on their employees’ compensation.

Employers can deposit up to 25% of their employee’s compensation into their SEP-IRAs. For 2021, contributions can be made on the first $290,000 of the employee’s pay and cannot exceed $58,000. In 2022, the compensation for the employee cannot exceed $61,000.

Employers must contribute equal percentages to each employee’s SEP-IRA. If employee A makes $100,000 and employee B makes $50,000, the employer must contribute $5,000 to B’s SEP-IRA if they want to contribute $10,000 to A’s account.


SEP-IRA Contribution Limits for the Self-Employed

Self-employed individuals have slightly different rules for determining their SEP-IRA contribution limit. You may only make contributions based on your net self-employment income. That means you need to deduct the deductible portion of your self-employment tax and the contributions made on your behalf to the plan to determine the maximum amount you can contribute on your own behalf.

This results is a contribution limit of roughly 20% of the business’ net earnings for self-employed people. The $58,000 limit still applies to the self-employed ($61,000 in 2022).


Pros and Cons of SEP-IRA Plans


  • Easy to Set Up: SEP-IRAs are designed to be easy to open and operate, making them ideal for the self-employed and small businesses.
  • Wide Choice of Investments: SEP-IRAs can hold almost any paper asset, giving you the flexibility to choose your own investments.
  • High Contribution Limit: Employers can contribute large amounts to their employee’s accounts. Self-employed people can use these accounts to save much more than they could with other retirement accounts.


  • Less Flexibility: SEP-IRAs don’t allow loans, like 401(k)s do. They can also impact future IRA rollovers making it harder to execute strategies like the Backdoor Roth IRA. If you do end up using a SEP-IRA, it would cause pro-rata issues with that Backdoor Roth IRA process (although that will change due to the Secure Act 2.0). Also, if you want to max out your SEP-IRA and you're self-employed, you're going to need even more income than you would if you wanted to max out a 401(k) (assuming you have no other 401(k)s).
  • No Employee Contributions: Employees can’t put money into their own SEP-IRA, which makes it more difficult for them to build retirement savings on their own.
  • Contributions Must Be Equal: Employers who choose to contribute to employees’ SEP-IRAs must contribute an equal percentage of each employee’s compensation to each employee’s account.
  • No Roth Option: Employers must contribute to a SEP-IRA on a pre-tax basis. There is no Roth contribution option.

More information here:
Difference Between SEP and SIMPLE IRA


Do You Pay Taxes on a SEP-IRA?

sep ira what it is

One of the primary benefits of retirement accounts is the fact that they offer tax incentives for retirement savings.

Employees who receive SEP-IRA contributions do not need to report those contributions as income on their taxes. An employee who makes $40,000 per year and who receives $10,000 in SEP-IRA contributions from their employer will only report an income of $40,000 for that year.

Instead, money is taxed when it is withdrawn from the SEP-IRA. Withdrawals can be made after the account’s beneficiary turns 59 1/2 without paying a penalty, and they are taxed as normal income.

A retiree who earned $20,000 of income and then also withdraws $5,000 from a SEP-IRA will report an income of $25,000 when filing their taxes.

The benefit of this tax deferral is that retirees, especially those who were physicians or other high earners during their peak working years, generally have lower incomes than when they were working. This will place them in a lower tax bracket so they will pay less tax on the money when they withdraw than they would have paid during the time period when the money was contributed to the account.


How to Open a SEP-IRA

Opening a SEP-IRA is a three-step process. The employer must:

  1. Create a written agreement to provide a SEP-IRA to all eligible employees
  2. Give employees information about that agreement
  3. Open accounts for each employee

The company that you choose as your SEP-IRA provider can help with these steps. Many major brokerage companies offer SEP-IRA services, so if you already have investment accounts, you can likely use the same company to run your SEP-IRA.


SEP-IRA Distributions and Withdrawals

SEP-IRAs, like other retirement accounts, limit when people can withdraw money from their accounts. In most cases, you can’t withdraw from the account until you turn 59 ½.

Early withdrawals incur a 10% penalty in addition to the taxes that are owed.

Withdrawals are treated as normal income in the year that they are made, which means you’ll pay income tax on any money taken out of the account. You can have the flexibility to decide when you make withdrawals, but SEP-IRAs are subject to Required Minimum Distributions (RMDs) starting in the year during which you turn 72.


Who Is Eligible for a SEP-IRA?

Individuals cannot open a SEP-IRA. They have to be opened by a business. A business of any size, from a self-employed business of one person to a major corporation, can open a SEP-IRA.

If you own your own business or are self-employed, you can choose to open a SEP-IRA and start making contributions on behalf of yourself and your employees.



If you’re considering a SEP-IRA for your business, you might also want to consider a SIMPLE IRA. Both accounts let employers help their employees save for retirement, but there are important differences between the two.



If you are self-employed or have your own business, a SEP-IRA is one option for increasing your retirement savings or for helping your employees save for retirement. There are many benefits to SEP-IRAs, and they are easy to set up and manage. However, 401(k) plans tend to offer more savings opportunities and flexibility.

If you can find a good 401(k) plan provider for your business, you’ll likely be better off than with a SEP-IRA. Take the time to consider each of the different retirement plan options available to find the one that’s best for you.


If you need extra help with planning for retirement or have questions about the best way to save your money in tax-protected accounts, hire a WCI-vetted professional to help you figure it out.


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