Surprising fact: small businesses that adopt a simplified employee pension can boost retirement savings by more than 30% when owners make steady contributions.
A SEP IRA gives self-employed owners and small employers a low‑hassle way to fund each participant’s individual account. Contributions come from the employer only, so administration stays light while employees still benefit.
Most SEPs require equal percentage contributions for eligible employees, which makes this option ideal for solo owners and tiny teams. The accounts follow standard IRA rules on investments and withdrawals, but offer higher contribution limits than traditional IRAs.
Because employer deductions reduce taxable income, many businesses with variable cash flow use this structure to match contributions to profits. If you want a straightforward savings vehicle with broad investment options, this can be a strong choice.
To compare this approach to other choices and learn setup steps, see our guide on top 401(k) plans and how they stack up.
Key Takeaways
- Employers fund contributions to individual SEP IRA accounts, keeping recordkeeping simple.
- Equal percentage contributions are required for eligible employees, suiting small teams.
- Contributions are typically tax‑deductible to employers and grow tax‑deferred.
- SEP IRAs use familiar IRA rules but allow larger contribution limits.
- Flexible funding works well for businesses with fluctuating profits.
Why SEP retirement plans fit senior entrepreneurs in the United States right now
For age 50+ entrepreneurs, a high‑limit employer-funded IRA often delivers a fast route to larger balances. Many self-employed individuals and very small businesses prefer this setup because it is simple to adopt and flexible to fund.
Key benefits:
- Higher contribution limits: Owners can contribute far more than with traditional IRAs, helping accelerate savings late in a career.
- Tax advantages: Employer contributions are generally deductible to the business and grow tax‑deferred inside each individual account.
- Operational simplicity: Adopt an IRS model agreement (such as Form 5305‑SEP), open accounts for eligible employees, and fund at a uniform percentage.
- Flexibility: Contributions can vary year to year, which helps businesses manage cash flow during slow and strong seasons.
This option suits owner-only businesses or very small teams because the equal percentage rule keeps costs predictable across employees. Later sections will detail contribution limits, eligibility, and comparisons with Roth IRAs and Solo 401(k)s. See our guide on retirement planning for self-employed to align contributions with broader savings goals.
What is a Simplified Employee Pension (SEP) and how an SEP IRA works
A Simplified Employee Pension channels employer-funded contributions into each participant’s individual IRA, removing the need for a pooled retirement trust. This design keeps administration light and makes yearly funding choices flexible.
How the money is deposited:
- Employers, including self-employed individuals, contribute to employees’ SEP IRAs rather than collecting elective deferrals.
- Employees do not make salary deferrals; all contributions come from the employer, which simplifies payroll and recordkeeping.
Uniform percentage rule: If an owner contributes, say, 15% of compensation to their own SEP IRA, eligible employees must receive the same percentage of their pay. This keeps costs consistent across participants.
SEPs follow standard IRA rules on investment options, distributions, and rollovers. To set one up, choose a trustee, sign an agreement like IRS Form 5305-SEP, and open SEP IRAs for eligible workers. Contributions can vary year to year and are always 100% vested once deposited.
“Contributions go straight into individual accounts, so participants own the assets immediately.”
sep retirement plan for seniors
Senior business owners can use an employer-funded IRA to boost savings late in their careers. Higher employer contributions help close gaps quickly while keeping account management familiar and straightforward.
The uniform percentage rule keeps contributions fair to any eligible employees while letting an owner prioritize meaningful funding for their own account. This approach suits owner-led businesses with few staff and helps preserve administrative simplicity.
Because SEP IRAs follow normal IRA rules, distributions are taxed like traditional IRAs and RMDs begin at age 73. Seniors should time withdrawals to manage taxable income and avoid jumping into higher tax brackets.
Coordinate contributions with Social Security and any pensions to smooth taxable income in retirement. Review business cash flow and choose contribution percentages that balance company needs and personal savings goals.
- Use employer contributions to accelerate late-stage accumulation.
- Keep accounts intuitive by leveraging familiar IRA rules.
- Compare alternatives like SIMPLE IRAs or Solo 401(k)s to match team size and deferral goals.
“When time is limited, focused employer funding can make a meaningful difference.”
For tips on coordinating income streams, see our guide on maximizing Social Security benefits.
Eligibility requirements for employers, employees, and self-employed individuals
Eligibility rules set who must receive employer contributions and which hires can wait until they meet minimum thresholds.
Standard employee tests:
- Age 21 or older.
- Worked for the employer in at least 3 of the last 5 years.
- Earned at least the annual compensation threshold ($750 in 2024).
Employers may include employees earlier than these minimums to aid retention, but they cannot impose stricter requirements than the law allows.
Permitted exclusions and special cases
Exclusions include employees covered by a valid union collective bargaining agreement and nonresident aliens without U.S.-source wages.
Any employer — sole proprietor, partnership, or corporation — can adopt this arrangement. Self-employed owners are treated as both employer and participant when calculating contributions.
“Eligibility is reassessed each year; new hires who meet the age, years-of-service, and compensation minimums must be included.”
| Who | Requirement | Notes |
|---|---|---|
| Employee | Age 21+ | Measured at plan year end |
| Employee | 3 of last 5 years | Consecutive years not required |
| Employee | Compensation ≥ $750 (2024) | Threshold set annually |
| Employer | Any business type | Can choose to include more employees |
2024 SEP IRA contribution limits and how to calculate your maximum
Contribution math in 2024 mixes a percent-of-pay ceiling with a fixed dollar limit and a compensation cap. The maximum is the lesser of 25% of eligible compensation or $69,000, and compensation up to $345,000 is used when computing that percentage.
Employees do not make salary deferrals; only employer contributions count toward these limits. That keeps payroll simple but means employers carry the funding responsibility.
Lesser of 25% of compensation or $69,000; compensation cap applies
Self-employed individuals must use the IRS worksheet to calculate allowable contributions. The worksheet adjusts net earnings from self-employment to reflect the deduction for the contribution itself.
Special calculation for self-employed compensation and contributions made
Concept example: a higher income lets an owner contribute a larger percentage, up to the $69,000 cap, but the $345,000 compensation limit can lower that percentage on big earners.
- No catch-up contributions are allowed in this setup, unlike some other options.
- Contributions are deductible to the business and are due by the employer’s tax return due date, including extensions.
- Document each contribution and apply the same percentage to all eligible employees to meet uniformity rules.
“Use the IRS worksheet and keep clear records so contributions match allowable limits and allocation rules.”
Owners should coordinate contributions with other income sources and consider tax brackets before funding. For guidance on IRA choices that may complement this approach, see top IRA accounts for beginners.
Taxes, withdrawals, and required minimum distributions for seniors
Tax treatment and withdrawal timing shape how owners use a SEP IRA late in their careers. Employer contributions are generally deductible to the business and not taxed to the employee in the year contributed. That makes contributions an efficient way to reduce current-year tax liability while letting funds grow inside the account.
Tax-deductible employer contributions and tax-deferred growth
Contributions made by an employer are excluded from employee income the year they arrive. Assets grow tax-deferred until distributions are taken, following normal IRA growth rules.
Distribution rules, 10% penalty before age 59½, and RMDs starting at age 73
Withdrawals are taxed as ordinary income when taken. Early distributions before age 59½ normally incur a 10% penalty unless a statutory exception applies.
Required minimum distributions must begin at age 73. Seniors should plan withdrawals to meet RMDs without causing large tax spikes.
- Deductible employer contributions: excluded from income in the contribution year.
- Ordinary income tax on withdrawals: distributions follow traditional IRA tax rules.
- 10% early withdrawal penalty: applies before age 59½ except for specific exceptions.
- RMDs at age 73: plan to take required amounts to avoid penalties.
- Rollovers and basis tracking: accounts follow standard IRA rollover rules; track any after-tax basis to prevent double taxation.
“Coordinate distributions with Social Security and other income to manage tax exposure and Medicare premiums.”
Comparing SEP IRA vs. Roth IRA, SIMPLE IRA, and Solo 401(k)
Different savings vehicles change who gives money, how much you can add, and when taxes apply. Use the short comparisons below to match features to your cash flow, team size, and tax goals.
SEP IRA vs. Roth IRA
Who contributes: Employer-only contributions go to a SEP IRA, and those amounts are generally tax-deductible.
Tax treatment and limits: A Roth IRA uses after-tax individual contributions that grow tax-free; its 2024 contribution limit is much lower (about $7,000 with catch-up). SEP accounts let businesses add far larger amounts but provide no tax-free withdrawals later.
SEP IRA vs. SIMPLE IRA
Elective deferrals: SIMPLE IRAs allow employees to defer part of their pay. SEPs do not accept employee deferrals.
Employer duty and catch-ups: SIMPLE mandates employer contributions each year (match or nonelective) and offers catch-up amounts for older workers. SEPs let employers choose whether to contribute and have no catch-up feature.
SEP IRA vs. Solo 401(k)
Flexibility and features: Solo 401(k)s let owners make both employer and employee contributions, include Roth options, and allow age-50+ catch-ups. That can raise total funded amounts and provide tax-diverse strategies.
Administration and suitability: A Solo 401(k) often requires more paperwork and possible filings. A SEP keeps admin simple and works well when an owner prefers uniform employer-funded allocations across eligible employees.
“If you want elective deferrals or Roth features and you’re a solo owner, a Solo 401(k) may outperform an employer-only option.”
| Feature | SEP IRA | Roth IRA | SIMPLE IRA | Solo 401(k) |
|---|---|---|---|---|
| Who contributes | Employer only | Individual after-tax | Employee + Employer | Employee + Employer |
| 2024 limits (typical) | Up to $69,000 (employer) | $7,000 (individual) | $16,000 elective | Up to $69,000 total + deferrals |
| Catch-up for 50+ | No | Yes (standard IRA rules) | Yes ($3,500) | Yes (401(k) catch-up) |
| Roth option | No | Yes | No | Yes |
Decide whether you need elective deferrals, Roth flexibility, or simple employer funding. For a deeper side-by-side comparison of these offerings, see our detailed guide on retirement plan comparison.
Setting up an SEP plan and meeting deadlines
Getting a compliant SEP in place is mainly about three administrative actions an employer must complete. Follow these steps early in the year to keep options flexible and avoid last-minute work when taxes are due.
Choosing a trustee and adopting an agreement
Step 1: Select a trustee — a bank, insurance company, or financial institution — that offers low-cost accounts and a broad range of investments.
Step 2: Adopt a written agreement such as IRS Form 5305‑SEP or a provider’s prototype to document the employer’s rules and eligibility requirements.
Opening accounts, notices, and contribution deadlines
Step 3: Open a SEP IRA account for every eligible employee and provide required notices so employees know eligibility, contribution methods, and timing.
- Contributions are due by the employer’s tax return filing deadline, including extensions, giving businesses time after year-end to finalize amounts.
- Keep written records of the agreement, eligibility checks, and contribution calculations for each account to meet compliance requirements.
- Coordinate payroll or accounting to compute the uniform percentage and transmit contributions on time.
Tip: Adopting the agreement early lets you confirm accounts are in place if you decide to fund the current year.
Contributions are deductible to the business. If you want a Roth-focused comparison or provider options, see our guide to top Roth IRA providers for 2025.
Investment options, risk considerations, and account management
Account holders can access a broad menu of mutual funds, ETFs, individual stocks, and bonds when they manage their IRA assets.
Investment flexibility and allocation strategy
SEP accounts inherit the same investment choices as traditional IRAs, letting an owner build a diversified mix across funds, ETFs, stocks, and fixed income.
Begin with an allocation that matches your time horizon and risk tolerance. As RMDs near, shift toward lower-volatility holdings to protect capital and steady income.
Simplify with target date funds and periodic checks
Target date funds can automate shifts and rebalancing, but they still carry market risk and do not guarantee returns or principal.
Review allocations at least annually and rebalance when holdings drift. Seniors may prefer more frequent risk checks as income needs change.
- Plan liquidity by keeping cash or short-term funds to cover upcoming withdrawals without forced selling.
- Compare account-level costs: expense ratios, trading fees, and any custodial charges that reduce net returns.
- Coordinate investments across all accounts to avoid overconcentration and to balance tax treatment of distributions.
Keep beneficiary designations current after major life events so account assets pass as intended. Also document any employer contributions and maintain clear records.
“A clear allocation and cost-aware approach helps protect savings and support predictable distributions.”
For guidance on building a target allocation that fits income goals and risk tolerance, see this discussion of an ideal retirement portfolio.
Compliance tips, Roth SEP updates, and small-business considerations
New law permits Roth treatment on employer-funded IRA contributions, but many custodians and employers still need time to update paperwork and systems.
Roth SEP and SIMPLE availability
Custodian adoption timelines and practical access
Since January 1, 2023, Roth contributions made by employers are allowed. The IRS gave providers until December 31, 2026 to revise agreements and systems. That means some institutions may not yet offer Roth SEP or Roth SIMPLE options.
Administrative simplicity and core rules
Remember: SEP plans accept only employer funding and do not permit employee salary deferrals. Employers must apply the same contribution percentage to all eligible employees in years contributions are made.
Compliance reminders: keep signed plan agreements, document yearly eligibility checks, and verify that contributions match the uniform percentage and annual limits. Confirm with your trustee which account types and Roth features they support and how any Roth employer contributions will be reported for tax purposes.
- Weigh SEP simplicity against plans that allow deferrals or catch-ups before deciding.
- Coordinate with a tax professional to confirm income inclusion rules and reporting steps.
- Maintain accurate records and observe deadlines to protect tax advantages.
For more context on new account choices, see this guide to new retirement savings accounts.
Work with an advisor to align your retirement plan with your business and age
A trusted financial advisor can model how different funding choices affect taxes and long-term savings.
Why get advice? An advisor and a tax pro help coordinate contributions, compare a sep ira with SIMPLE or Solo 401(k) options, and set funding amounts that match business cash flow.
They can run contribution scenarios across accounts and taxable holdings. That makes it easier to estimate future income, RMD exposure, and the tax impact of different withdrawals.
Coordinating contribution limits, income, and planning across multiple accounts
- Model contribution limits and employer deadlines tied to the business tax return, including extensions, so final contributions reflect actual income.
- Align investment choices and withdrawal timing across accounts to manage risk and tax brackets.
- Evaluate Roth employer options (if your custodian supports them) and how after-tax vehicles affect lifetime tax outcomes.
- Schedule regular reviews as employees or income change to keep the approach current.
“Work with advisors to build a multi-year tax and withdrawal plan that smooths income and preserves savings.”
Conclusion
A flexible, employer-funded vehicle lets small owners boost savings when cash flow allows while keeping paperwork minimal.
Key takeaways: generous employer contributions, the 2024 maximum limits, the uniform percentage rule, deductible employer funding, and IRA-based distribution rules with RMDs at age 73 all shape how this pension works.
Compare features — Roth IRA, SIMPLE IRA, and Solo 401(k) — to balance deferrals, catch-ups, Roth options, and administrative load. Choose a trustee, adopt the written agreement, open accounts, and schedule contributions to meet your tax filing deadline.
Review contribution percentages as business profits and personal goals change. Work with an advisor to fold this approach into a broader tax and income strategy tailored to your business size and age.
For related guidance on broader savings choices, see our retirement planning tips.