SEP IRA - Simplified Employee Pension

What is a SEP IRA?

SEP stands for Simplified Employee Pension. A SEP IRA lets employers and self-employed individuals make tax-deductible contributions to retirement accounts. Employers make these contributions for their eligible employees. Contributions go into individual IRA accounts held in each employee's name, grow tax-deferred, and are taxed only when withdrawn. The SEP IRA plan is flexible: employers choose how much to contribute each year, and it doesn't have the start-up operating cost required in traditional IRAs like 401(k)s.

Key Features of SEP IRA Pension Plan

Here's a snapshot of the core features of a Simplified Employee Pension (SEP IRA).

Eligibility Criteria for SEP IRA

A business of any size or structure can establish a SEP IRA, provided it meets IRS requirements. The table below describes both employer eligibility and employee inclusion rules.

Data Sources: IRS, as of June 2026

How Does SEP IRA Work?

• Step 1: The Employer Sets up a SEP IRA

  • Creates a separate SEP IRA account for each eligible employee

  • Determines contribution amount for each employee

• Step 2: Contributions to Employee Accounts

  • Employer contributes to the SEP IRA account of each employee

  • Contributions are tax-deductible

  • The same contribution percentage must apply to all eligible employees, including the business owner

• Step 3: Investments from SEP IRA Funds

  • Employees invest the funds in a variety of assets, such as:

  • Stocks
  • Bonds
  • Mutual Funds
  • Exchange-Traded Funds (ETFs)

  • The funds grow tax-deferred until they are withdrawn.

• Step 4: Withdrawals on Retirement

  • Employees can start withdrawing funds from their SEP IRA after age 59½ without penalty

  • Withdrawals are taxed as ordinary income at current tax rates

Contribution Limits of a SEP IRA in 2026

The IRS reviews SEP IRA contribution limits annually. The table below shows the updated figures across recent years.

Data Sources: IRS, as of June 2026

What Are the Tax Implications of a SEP IRA?

Contributions to a SEP IRA are tax-deductible for the employer, reducing taxable income in the year they are made. The invested funds grow tax-deferred, meaning no taxes are owed until withdrawal. Withdrawals are taxed as ordinary income. Withdrawals before age 59½ incur a 10% early withdrawal penalty. From age 73, account holders must take Required Minimum Distributions (RMDs) each year, as mandated by the SECURE 2.0 Act.

Sources: IRS.gov (RMD rules); carry.com

What Are the Pricing Details for a SEP IRA Account?

SEP IRA accounts are generally low-cost to open and maintain. Most major providers charge no account setup fee. Annual maintenance fees, where they apply, are typically modest. For example:

• Fidelity and Schwab: No account opening or annual maintenance fees; commission-free trading on stocks and ETFs.

• Vanguard: No setup fee; $25 annual fee per brokerage account (waived for accounts with $5 million+ in Vanguard assets, or by signing up for electronic statements).

How Do I Invest My SEP IRA?

Once the employer opens a SEP IRA account and starts making contributions, the account holder (the employee) controls the investments. Here is how it works:

• Choose a provider: Open a SEP IRA with a bank, brokerage, or financial institution (for example, Fidelity, Schwab, or Vanguard).

• Select your investments: Choose from available options in your SEP retirement account: stocks, bonds, mutual funds, ETFs, and certificates of deposit (CDs).

• Set an allocation: Decide how to split contributions across asset classes based on your retirement timeline and risk tolerance.

• Review and rebalance: Review the portfolio periodically and adjust allocations as needed.

• Maintain IRS limits: Ensure total annual contributions do not exceed the IRS cap

How to Establish a SEP IRA Plan

• Determine the eligibility of the organisation to open a SEP retirement account.

• Decide on a financial institution as the SEP IRA plan provider.

• Adopt a written SEP IRA plan document that outlines the terms of the plan: eligibility criteria, contribution limits, and vesting requirements.

• Notify employees about the SEP IRA and the participation process in writing.

• Set up a separate SEP IRA account for each eligible employee.

• Determine contributions for each eligible employee.

• Make contributions to the employee's SEP IRA account before the employer's tax filing deadline for the year.

• Keep accurate records of all contributions to the SEP retirement account for at least 6 years.

Important SEP IRA Rules

The table below covers the key SEP IRA rules governing the Simplified Employee Pension plan.

SEP IRA rules as of June 2026

SEP IRA vs. 401k Retirement Plan

Both SEP IRA vs. 401k plans offer tax advantages and can be effective tools for retirement savings. Below are the key differences.

SIMPLE IRA vs. SEP IRA

Both are retirement plans designed for small businesses, but they differ in who contributes, how much, and under what conditions.

Data Source: IRS (2025–2026)

SEP IRA vs. Roth IRA

SEP IRAs and Roth IRAs take opposite approaches to tax treatment. Here is a side-by-side comparison.

Sources: IRS (2025–2026)

Benefits of a SEP IRA Plan

• Easy to Set Up: SEP IRA plans are easy to establish with minimal paperwork.

• Low Expenses: Low administrative costs compared to other retirement plans like 401k.

• Tax-Deductible Contributions: Contributions reduce the employer's taxable income in the year they are made.

• Tax-Deferred Growth: Contributions grow tax-deferred until withdrawal, helping accumulate more savings for retirement.

• Higher Contribution Limits: At up to $70,000 in 2025, SEP IRA limits are far higher than traditional or Roth IRAs.

• No Age Restrictions: There is no age restriction for contributions to a SEP IRA, unlike traditional IRAs.

• Easily Portable: SEP IRA accounts are portable. Employees can take their account with them if they change jobs.

• Flexibility for Employers: Employers decide how much to contribute each year, and can skip contributions in lean years.

Summary

A SEP IRA is a tax-advantaged retirement savings plan for small business owners and self-employed individuals. Employers can contribute up to $70,000 (2025) or $72,000 (2026) per eligible employee per year. SEP IRA plans offer high contribution limits, immediate vesting, and flexibility while being seamless to set up and maintain.