How to Manage a Simplified Employee (SEP) IRA Plan

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The simplified employee pension individual retirement account (SEP IRA) is a cost-effective option for small business owners who want to offer retirement benefits to their employees. The employer may also contribute to their own SEP account.

As the name implies, setting up and managing a SEP IRA is streamlined compared to procedures for establishing and maintaining other qualified retirement plans used mostly by big corporations, such as the 401(k).

Notably, contributions to a SEP IRA are made entirely by the employer. Employees, however, may open their own Individual Retirement Account (IRA) and contribute up to the annual limits. SEP contributions must be made by the tax filing deadline for the year they are made. Here is a closer look at SEP IRAs, how contributions work, and when they are due.

Key Takeaways

• In a typical year, employers must contribute to a SEP IRA by the tax filing deadline, which is usually April 15th.
• If the employer has filed an extension, then the final SEP IRA contribution date is the extension deadline, which is usually Oct. 15.
• The maximum contribution to a SEP IRA is $66,000 in 2023 (increasing to $69,000 in 2024).

Contribution Deadline for SEP IRAs

Employer contributions to a SEP IRA are made in tax-deductible dollars. Business owners, including the self-employed, can also open a SEP IRA account and contribute to their own retirement savings.

In either case, the deadline is the same. Contributions must be deposited into every employee's SEP IRA account by that year's tax filing deadline, which is typically April 15 of the following year.

If the employer has filed an extension, then the final SEP IRA contribution date is the extension deadline, which is usually Oct. 15.

For example, say John earns $50,000 a year at XYZ Corp. The company wants to contribute 15% of each employee's compensation to their SEP IRA accounts in 2023. This means that John will receive a $7,500 contribution to his SEP IRA for 2023.

In a normal year, XYZ Corp. would have until April 15 of the following year to contribute to the employee SEP IRA accounts. If XYZ has filed a tax-filing extension until Oct. 15, then the contributions must be made for John and all other employees by that date.

SEP IRA Contribution Limits

One of the advantages of a SEP IRA is that it has much higher contribution limits than a traditional or Roth IRA. The annual contribution limit for a traditional or Roth IRA is $6,500 in 2023 (increasing to $7,000 in 2024), plus $1,000 for those aged 50 or older.

With a SEP IRA, in 2023, an employer can contribute as much as 25% of an employee's gross annual salary or $66,000, whichever is less (increasing to $69,000 in 2024). To determine their annual limits, self-employed business owners must make a special computation that factors in the deductible portion of their self-employment tax.

With a SEP IRA, employers may change their contribution levels from year to year based on business considerations.

With a 401(k), employers may match a percentage of the employee's contribution. However, in the SEP IRA, the contribution is entirely up to the employer and can change from year to year.

In effect, this makes it a kind of profit-sharing plan. When business is great, the employer may make a generous contribution, as much as 25% of each employee's salary. When business is bad, the employer may reduce or eliminate the company contribution.

This is not a bonus plan, though. If an employer has a SEP IRA, an identical percentage of salary must be deposited for each eligible employee.

What Is the Contribution Limit for a SEP IRA?

The contribution limit for a SEP IRA in 2023 is 25% of the employee's compensation or $66,000—the lesser of the two. In 2024, this amount increased to $69,000.

Who Is Eligible for a SEP IRA?

Employees are eligible for a SEP IRA if they are 21 years or older, have worked for the business for at least three of the last five years, and have received at least $750 in compensation for 2023 and 2024 from the business.

What Is a Disadvantage of a SEP IRA?

The primary disadvantage of a SEP IRA is that it does not allow for employee contributions. Other retirement plans, such as a 401(k) or 403(b), allow employees to contribute part of their income to a plan. With a SEP IRA, you are reliant only on your employer to contribute money for you.

The Bottom Line

A SEP IRA is a way for small business owners to provide their employees with a retirement plan. With a SEP IRA, an employer makes the contributions as opposed to the employee, and they must do so before the tax filing deadline of the following year.

1. Internal Revenue Service. "Simplified Employee Pension Plan (SEP)."
2. Internal Revenue Service. "SEP Plan FAQs."
3. Internal Revenue Service. "Extension of Time to File Your Tax Return."
4. Internal Revenue Service. “401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000.”
5. Internal Revenue Service. "2024 Limitations Adjusted as Provided in Section 415(d), etc." Page 1.
6. Internal Revenue Service. "Publication 560, Retirement Plans for Small Business."
7. Internal Revenue Service. "Operating a 401 (k) Plan."
8. Internal Revenue Service. "2024 Limitations Adjusted as Provided in Section 415(d), etc." Page 2.

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A SIMPLE IRA is a retirement savings plan that can be used by most small businesses with 100 or fewer employees.

A conduit IRA is an account used to roll over funds from a qualified retirement plan to another qualified plan.

An individual retirement account (IRA) is a retirement savings plan with tax advantages that taxpayers can use to invest over the long term for retirement.

An education IRA is a tax-advantaged investment account for higher education, now more formally known as a Coverdell Educational Savings Account (ESA).

The Roth ordering rules govern the way in which money in a Roth retirement account is withdrawn and, therefore, determine whether any taxes are due.

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