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SEP IRA Rules (Simplified Employee Pension)

A senior couple researching SEP IRA rules on their tablet.

Making regular contributions to a retirement account is a great way to grow a nest egg to supplement your Social Security.

A retirement account that was designed for those who are self-employed or are business owners is called a SEP IRA. Although establishing a SEP IRA is easy, there are some special rules you should be aware of before opening an account to make sure you qualify.

What Is a SEP IRA?

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a type of retirement account that is very similar to a traditional IRA. The primary difference is that SEP IRAs are for those who are self-employed or are business owners.

It’s a great way for the millions of self-employed to save and invest for retirement so they can have money set aside for when they stop working.

With a SEP IRA, the account holder’s contributions grow tax-deferred. When that person reaches retirement age, withdrawals are taxed as income. Accounts grow through the compounding of interest where interest is earned on contributions and previous interest earned.

How Does a SEP IRA Work?

SEP IRAs are established and funded by those who are self-employed or business owners. This is different from 401(k) plans, which are typically established by employers.

Business owners with one or more employees may also offer SEP IRAs to their employees. If an employer offers them, they are required to contribute an equal amount to all eligible employees.

According to the SEP IRA rules, only certain employees who meet the following requirements are eligible to participate in this type of account:

  • Must be at least 21
  • Earned at least $750 in 2023
  • Employees have control and ownership of their accounts
  • Worked for the business for a minimum of three of the past five years
  • Business owners must contribute the same percentage of compensation to their employees’ accounts as they contribute to their accounts

What Are the SEP IRA Contribution Limits?

Just as traditional IRAs have contribution limits, SEP IRAs also have limits on how much you can contribute annually. Good news—SEP IRAs allow you to contribute significantly more to your retirement account than traditional IRAs. This could allow you to grow a larger retirement nest egg or grow it faster to help you reach your retirement goals.

The amount you can contribute to a SEP IRA may change from one year to the next, so it’s important to check with the IRA to see what the new limits are before contributing each year. In 2023, you can contribute up to $66,000.

There are some important exceptions to those contribution limits to consider, however. Annual SEP IRA contributions may not exceed the lesser of:

  • 25% of compensation
  • $66,000 in 2023

For the 25% of compensation limit, the amount you can use to determine the limit cannot exceed $330,000 in 2023.

How Do You Open a SEP IRA?

Setting up a SEP IRA is very easy and can be completed in the following steps.

  1. Choose a SEP IRA provider.
  2. Submit IRS Form 5305-SEP or other requested documentation to the provider.
  3. Inform your employees of the SEP IRA (if applicable).
  4. Establish SEP IRAs for each employee who wants to participate.

After your SEP IRA account is established, you can then fund it. Your provider will offer you a selection of investments that you can choose from to grow your account. Investments should be carefully considered based on your risk tolerance and how many years you have until retirement.

Can I Have a SEP IRA and a 401(k)?

Yes, it’s possible to have both a SEP IRA and 401(k) plan, but this type of situation usually occurs when someone has an employer that offers a 401(k) plan and that person also has income from a separate business.

You can contribute to both accounts at the same time and take advantage of the 401(k) match if your employer offers it. However, the two retirement accounts must be offered by different companies for you to have both at the same time.

An important benefit of 401(k) plans is that many companies will match the contributions you make to your account. This means that the company is adding money to your retirement account at no cost to you. So essentially, it’s like getting free extra money towards retirement every time you make a contribution.

Keep in mind though, that a 401(k) is a type of retirement account that is offered by employers, so it isn’t possible to set up one yourself. The money that is invested in this type of account is done with pre-tax dollars, which means it hasn’t been taxed yet. It will be taxed when you retire and begin making withdrawals.

Can I Have a SEP IRA and a Roth IRA?

Yes, you can have both a SEP IRA and Roth IRA at the same time. A Roth IRA is a retirement account that is funded with after-tax dollars, which means you have already paid income taxes on the money you contribute. Therefore, you don’t have to pay additional taxes on the money you withdraw when you retire.

Contribution limits for Roth IRAs are $6,500 (or $7,500 if you are 50 and over) for 2023.

SEP IRAs With Jeanne D’Arc Credit Union

If you are self-employed or a business owner and you’re interested in setting up a retirement account, Jeanne D’Arc Credit Union offers a SEP IRA that is very easy to set up. You just print and fill out the documentation from our website and then arrange a meeting with our Retirement Plans Manager.

You can also set up SEP IRAs for your employees through Jeanne D’Arc as well.

Click on the following link to learn more about our SEP IRAs and to see how easy it is to get started.

See our SEP IRA benefits