SEP IRA Contribution Limits, Deadline, and Rules

Any size business can have a SEP IRA, even if you are self-employed you can have one. SEP IRAs are beneficial to companies that have differing amounts of cash flow each year, as well as self-employed individuals that want to load a lot of cash into their retirement accounts.

What is a SEP IRA?

Simplified Employee Pension Individual Retirement Account is much simpler to refer to as a SEP IRA. This is a way for employers, or yourself in a sole proprietorship, to contribute to a retirement account on your behalf.

A big difference between the SEP plan and your traditional 401k or ROTH IRA is that there is no contribution by the employee to the plan, it is just the employer that contributes. In a SEP plan, the contribution percentage must be equal across all employees that are eligible.

This is huge for self-employed small business owners because you could contribute up to the limit for yourself and it would all be tax-advantaged. The SEP IRA is a great way to catch up on retirement plan contributions if you were not able to contribute as much in previous years. For example, the 401k max contribution for 2023 is only $22,500 while the SEP IRA has higher contribution limits at almost three times that much.

A few considerations for a SEP plan include:

• Fairly easy to create and operate afterward
• Administrative costs are low compared to other workplace retirement plan options
• Annual contributions are flexible. You aren’t stuck to a certain percentage like other plans
• The employer contributions are the same percentage for all of the eligible employees

SEP IRA Contribution Limit

You can contribute the lesser of 25% of the employee’s income or $66,000 for 2023.

Two important callouts. The percentage of contribution has to be the same for each and every employee, and elective salary deferrals and catch-up contributions are not allowed in any SEP plans. This means that extra contributions to reward some employees over others are not allowed. A lot of solopreneur businesses can use SEP IRAs to contribute a lot to retirement, and will only be paying into their own plans.

SEP IRA Contribution Deadline

The SEP-IRA contribution deadline is before you pay business income taxes (including extensions) for the tax year you want the contributions to be in.

For example, this could be April 15th if you do not file any extensions and any amount paid into the plan before then would count towards the limit for the tax year. If you and your company have gotten a tax-filing extension to October 15th then that would mean that you would have until then as a due date to contribute to the SEP IRA for the previous year.

SEP IRA Contribution Example

Let’s say that you are a successful small business owner and have four eligible employees for the SEP IRA. Your contributions for 2023 would look like the following.

The * denotes that the SEP-IRA contribution limit of $66,000 for 2023 applied, and limited the maximum SEP-IRA contributions you could add for yourself to $66,000.

This example helps determine the best percentage rates of contributions for the year to consider based on cash flow for the business, everyone’s salaries, and the maximum contribution.

How to Start a SEP IRA

First and foremost you are going to need to select a financial institution to be the IRA custodian that will administer the accounts that contain each of your employee’s retirement plan funds. If you are a solopreneur this also applies to you. The account(s) that are set up will be receiving the contributions made to the plan.

There are actually only three steps to successfully set up a SEP.

1. Execute a written agreement that provides SEP benefits to every eligible employee. The written agreement has to have the name of the employer, all the requirements for an employee’s participation, as well as the signature of the responsible official, and finally the allocation formula.
2. Provide your employees with specific information pertaining to the agreement. This includes a notice that a SEP IRA plan has been adopted by the company, the basis for employee contribution allocation, and the actual requirements to receive allocations.
3. Create a SEP IRA account for each eligible employee. The accounts can be set up at banks, insurance companies, or really any qualified financial institution. Each and every SEP contribution has to go to a traditional IRA account. Each employee is then in charge of creating their own investment decisions within their own account. This could be mutual funds, retirement savings, or anything else the employee's financial advisors recommend.

SEP Plans can be created for a tax year before your business tax deadlines for the year. Once taxes have been paid, the SEP plan would have to be created for the following tax year. This is confusing because this is dealing with the tax year and not the calendar year.

Do you Report SEP IRA Contributions?

No. As the owner of the business, there are no filing requirements with the IRS (Internal Revenue Service).

SEP contributions should not be included on an employee’s W2 form, but the Retirement Plan box inside of box 13 should be checked. More information on W2s can be found on the IRS’s W2 instructions document.

Before you leave the page, you should know there are requirements of notice given to employees that are participating in the plan. These include:

• An annual statement of contributions. This is so then your employees know how much was added to their SEP plan and when.
• Requirements for receiving contributions. This allows your employees to know if they should be expecting contributions to their SEP plan, and if not why they are not going to receive contributions for the current year.
• Amendments to the SEP. If the Simplified Employee Pension plan has any changes to it, these updates need to be provided to the employees that are eligible for the plan.
• Copy of Form 5305-SEP. This can also be a prototype document if IRS Form 5305-SEP was not used.
• Documents and disclosures listed on Form 5305-SEP. This includes all necessary statements and information your employees need to successfully participate in the SEP plan.

What are the Withdrawal Rules for a SEP IRA?

SEP-IRAs are governed using the same tax laws as traditional IRAs. This means that the withdrawal is taxable the year it takes place If there is a withdrawal made before you reach the ripe old age of 59.5 years old there is usually a 10% additional tax upon the withdrawal. The exact laws around the 10% tax can be found on the IRS website.

Any contributions and the earnings on those contributions can be rolled over without tax to other retirement plans and IRAs. SEP contributions and earnings are subject to the minimum distribution rules like other IRAs. In short, these are forced withdrawals starting at age 72 and have more complications depending on business ownership, type of retirement account, etc.

An important callout about SEP IRAs is unlike other retirement plans, there are no participant loans permitted. This means that you can’t borrow from your SEP IRA like you can from your 401k or ROTH IRA, etc.

Final Thoughts

A SEP IRA can be a fantastic way to catch up on retirement plan contributions for a self-employed business owner. They also can be very beneficial for businesses where the cash flow can change drastically year to year. If you don’t have a retirement plan set up for your business, speak with your financial advisor so you can have more opportunities for tax-advantaged dollars working for you!

This should not be considered investment advice or legal advice.

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