Editing SEP-IRA

{{Short description|Type of retirement pension account used in the United States}}

A '''Simplified Employee Pension Individual Retirement Arrangement''' ('''SEP-IRA''') is a variation of the [[Individual Retirement Account]] used in the United States. SEP-IRAs are adopted by business owners to provide retirement benefits for themselves and their employees.<ref>{{Cite web|url=https://money.cnn.com/retirement/guide/selfemployment_sep_ira.moneymag/|title=What is a SEP IRA?|last=|first=|date=|website=money.cnn.com|publisher=|access-date=2016-09-02}}</ref> There are no significant administration costs for a self-employed person with no employees. If the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. Since SEP-IRAs are a type of IRA, funds can be invested the same way as most other IRAs.

The deadline for establishing the plan and making contributions is the filing deadline for the employer's [[tax return]], including extensions.

The strictest conditions employers may place on employee eligibility are as follows. The employee must be included if they have:<ref>{{cite web|url=https://www.irs.gov/retirement-plans/plan-participant-employee/who-can-participate-in-a-sep-or-sarsep-plan|title=Who Can Participate in a SEP or SARSEP Plan?|publisher=[[Internal Revenue Service]]|date=November 23, 2020|access-date=February 21, 2021}}</ref>
# attained age 21
# worked for the employer in three of the previous five years
# received at least $650 in compensation for tax year 2021 ($600 for 2019 and for 2020)

Employers may use less restrictive criteria.<ref>{{cite web |url=https://www.irs.gov/Retirement-Plans/SEP-Plan-FAQs-Participation-Requirements |title=SEP Plan FAQs - Participation Requirements |date=2016-02-19 |publisher=Internal Revenue Service |access-date=2016-09-02}}</ref>

SEP-IRA funds are taxed at [[ordinary income]] tax rates when qualified withdrawals are taken after age {{sfrac|59|1|2}} (as for traditional IRAs). Contributions to a SEP plan are deductible, lowering a taxpayer's income tax liability in the contribution year.

==Contribution limits==
SEP-IRA contributions are treated as part of a profit-sharing plan. For employees, the employer may contribute up to 25% of the employee's wages to the employee's SEP-IRA account. For example, if an employee earns $40,000 in wages, the employer could contribute up to $10,000 to the SEP-IRA account.

The total contribution to a SEP-IRA account should not exceed a) the lesser of 25% of income (20% for self-employed before self-employed tax deduction is included; [[#Self-employed|see below]])); or b) $42,000 (for 2005), $44,000 (2006), $45,000 (2007), $46,000 (2008), $49,000 (2009–2011), $50,000 (2012), $51,000 (2013), $52,000 (2014), $53,000 (2015–2016), $54,000 (2017), $55,000 (2018), $56,000 (2019), $57,000 (2020), $58,000 (2021), $61,000 (2022), $66,000 (2023), or $69,000 (2024) .<ref>{{cite web|url=https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps|title=SEP Contribution Limits (including grandfathered SARSEPs)|publisher=[[Internal Revenue Service]]|date=November 12, 2020|access-date=February 25, 2025}}</ref> For 2010 and 2011, the compensation used in the calculation was capped at $245,000 (e.g., an employer making a 10% contribution cannot contribute more than $24,500 for any employee).<ref name=":0" />

===Self-employed===
The contribution limit for self-employed persons is more complicated; barring limits, it is 20% of net profit. The computation is in IRS Pub 560, section 5, ''Table and Worksheets for the Self-Employed'', specifically ''Rate Worksheet for Self-Employed''.<ref name=":0">{{cite web|url=https://www.irs.gov/publications/p560#en_US_2019_publink10009067 |title=IRS Pub 560 (Retirement Plans for Small Business - SEP, SIMPLE, and Qualified Plans)|publisher=[[Internal Revenue Service]]|date=March 10, 2020|access-date=February 21, 2021}}</ref>

Two complications are:
*[[Federal Insurance Contributions Act tax]] (FICA)
*Reduced rate

====FICA tax====
SEP contribution limits are computed not from net profit but from net profit ''adjusted'' for the deduction for self-employment tax (2019 [[Form 1040]] Schedule C, line 31; 2019 Form 1040, Schedule F, line 34; or 2019 Form 1065, Schedule K-1, box 14, code A). Barring limits, this is half the 15.3% FICA tax, levied on net earnings, which is 92.35% of net profit. Therefore, adjusted net profit (net profit minus deduction for self-employment tax) is 92.935225% of net profit, which is close to but slightly more than net earnings.<ref name=":0" />

====Reduced rate====
The limit of 25% applies to wages, not (adjusted) net profit. In the above example, where an employee earns $40,000 and the employer contributes 25% of that, $10,000, the employee has received $50,000 total, of which 20% goes to the SEP-IRA.

When a business is a sole proprietorship, the employee/owner both pays themselves wages and may also make a SEP contribution, which is limited to 25% of ''wages'', namely, profits minus SEP contribution. For a particular contribution rate ''CR'', the reduced rate is ''CR/(1+CR)''; for a 25% contribution rate, this yields a 20% reduced rate, as in the above.<ref name=":0" />

====Overall====
Thus, the overall contribution limit (barring limits) is 20% of 92.9% (that is, 18.6%) of net profit.

For example, if a sole proprietor has $50,000 net profit from self-employment on Schedule C, then the "1/2 of self-employment tax credit", $3,532, shown on adjustments to income at the bottom of [[form 1040]], will be deducted from the net profit. The result is then multiplied by 20% to arrive at the maximum SEP deduction, $9,293.<ref name=":0" />

==Withdrawal rules==
SEP contributions and earnings are held in SEP-IRAs and can be withdrawn at any time, subject to the general limitations imposed on [[Traditional IRA]]. A withdrawal is taxable in the year received. If a participant makes a withdrawal before age 59½, generally a 10% additional tax applies. SEP contributions and earnings may be rolled over tax-free to other [[Individual retirement account]] and retirement plans.

SEP contributions and earnings must eventually be distributed following the IRA required [[IRA Required Minimum Distributions]].

==See also==
*[[401(k)]]
*[[457 plan]]
*[[Roth IRA]]
*[[SIMPLE IRA]]
*[[Solo 401(k)]]
*[[Traditional IRA]]
*[[Form 1099-R]]

==References==
{{reflist}}

==External links==
*[https://www.irs.gov/pub/irs-pdf/p590.pdf IRS Pub 590 (Individual Retirement Arrangements)]
*[https://www.irs.gov/pub/irs-pdf/f5305sep.pdf IRS Form 5305 (SEP Agreement)]

{{DEFAULTSORT:SEP IRA}}
[[Category:Individual retirement accounts]]
[[Category:Retirement plans in the United States]]