A SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) is a type of retirement plan designed primarily for self-employed individuals and small business owners to save for retirement. It allows employers to make tax- deductible contributions to traditional IRAs set up for themselves and their eligible employees
. Key features of a SEP IRA include:
- Employer-funded: Only employers contribute to SEP IRAs, unlike other plans where employees can also contribute
- Higher contribution limits: In 2024, employers can contribute up to 25% of an employee's compensation or $69,000, whichever is less, which is significantly higher than traditional or Roth IRAs
- Immediate vesting: Contributions are 100% vested immediately, meaning employees own the funds as soon as they are deposited
- Flexible contributions: Employers can decide each year whether to contribute and how much, allowing flexibility based on business performance
- Eligibility: Employees must be at least 21 years old, have worked for the employer for three of the last five years, and earned a minimum compensation (e.g., $750 in 2024)
- Tax treatment: Contributions are tax-deductible for the employer, and the funds grow tax-deferred until withdrawal, at which point distributions are taxed as ordinary income
SEP IRAs are simpler and less costly to administer than many other employer- sponsored retirement plans, making them attractive for small businesses and self-employed individuals
. They provide a way for business owners to save for retirement while offering retirement benefits to employees on a uniform basis
. In summary, a SEP IRA is a retirement savings plan funded by employers, offering high contribution limits and tax advantages, primarily aimed at small businesses and self-employed people
