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Understanding Simplified Employee Pension (SEP) IRAs [2025]

By January 27, 2025June 24th, 2025No Comments

Simplified Employee Pension (SEP) IRAs are for anyone who is self-employed, owns a business, employs others, or earns freelance income. SEP IRAs offer a way to save a more significant amount than Traditional or Roth IRAs and cost less to set up and maintain than many employer sponsored retirement plans.[1]

Key aspects of Simplified Employee Pension (SEP) IRAs:

Unique to SEP IRA plans: Contributions are only made by the employer but can be reduced, stopped, or increased by an employer. Small business owners often use this type of plan in industries with fluctuations in profits. This allows the owner to contribute to their employee and their own accounts as business permits.[2]
  • If you start a SEP IRA when you have no employees and decide to hire employees, they must also be covered under the plan if they meet the eligibility requirements. Employers must allow all employees to participate if they are 21 and above, have worked for your business in at least 3 of the last five years, and have made at least $750 in income per year as of 2024. There are some restrictions beyond this for people who are not US citizens and some types of union members. Employers may choose more lenient rules like removing the age limit, years of service, or income cap, but they can’t restrict their plans beyond these standards. 2,[3],[4]

Compensation Cap: The maximum compensation that can be considered for SEP contributions in 2025 is $350,000.

Understanding Simplified Employee Pension (SEP) IRAs [2025]

  • With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.[6]

Self-Employed Individuals: For self-employed individuals, the contribution limit is calculated as 25% of net earnings from self-employment, after deducting half of the self-employment tax and SEP contributions.

Unique to SEP IRA plans: Each owner and qualifying employee have their own SEP IRA, usually set up through the owner’s choice of account provider. These plans are best for businesses that have no or very few employees because they are very strict with contribution amounts- if, as an owner, you are choosing to contribute 20% of your income to a SEP IRA, then you need to be prepared to add 20% of all participating employee’s salary to their SEPs too. 4

  • Investment options include individual stocks, mutual funds, ETFs, annuities, UITs, etc. Investment vehicles not allowed in IRAs are Life Insurance, types of Derivatives Positions, antiques/collectibles, personal real estate, and most coins.[7]
  • Fees vary from institution to institution. It is important to understand how much you are paying in fees.
  • The earliest you can take penalty-free withdrawals is 59 ½. However, there are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you have medical expenses that exceed 10% of your modified adjusted gross income, the cost for your medical insurance while you’re unemployed, your qualified higher education expenses, the amount to buy, build or rebuild a first home (up to $10,000), your withdrawal is in the form of an annuity, your withdrawal is a qualified reservist distribution, you’re the beneficiary of a deceased IRA owner, or the withdrawal is the result of an IRS levy.2
Secure Act 2.0 Change: Required Minimum Distributions (RDMs) need to start at 70 1/2 if you were born before 7/1/49; 72 if you were born on or after 7/1/49 or in 1950; 73 if born between 1951 and 1958; 75 if born in 1960 or later. If you were born in 1959, federal guidance is needed to determine if your Required Beginning Date is age 73 or 75. RMDs are required even if you are still working. 2
  • If you leave an employer, you can take your money with you. These accounts can be rolled over to a like tax-designated account. [8]

If you want to explore additional retirement investment accounts that could work for your goals, Scarlet Oak Financial Services can be reached at 800.871.1219 , or you can contact us here.  To sign up for our newsletter with the latest economic news, click here. 

 

Sources:

[1] https://www.nerdwallet.com/article/investing/what-is-a-sep-ira

[2] https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep

[3] https://money.usnews.com/investing/articles/2016-07-06/5-things-you-should-know-about-an-sep-ira

[4] https://www.irs.gov/pub/irs-drop/n-22-55.pdf

[5] https://www.irs.gov/pub/irs-drop/n-23-75.pdf

[6] https://www.investor.gov/sites/investorgov/files/2019-02/Saving-and-Investing.pdf

[7] https://www.investopedia.com/articles/retirement/11/impermissable-retirement-investments.asp

[8] https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

https://www.fidelity.com/retirement-ira/small-business/sep-ira

https://investor.vanguard.com/small-business-retirement-plans/sep-ira

https://www.theentrustgroup.com/hubfs/ira-contribution-limits-download.pdf

https://eresourcecenter.ascensus.com/idcpro/groups/public/@resourcecenter/documents/webcontent/T014414.pdf

This material has been prepared for informational purposes. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.