A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a retirement account designed for small business owners, self-employed individuals and their employees. The employer can make contributions to retirement accounts that belong to themselves and their employees.
Contributions made to SEP IRAs are deductible for the employer. Employees, which also include the employer if self-employed, have the option to make additional annual Traditional IRA contributions to the same account.
To open a SEP IRA account, you must meet the following requirements:
- The employer must cover all employees over the age of 21 who meet a minimum income requirement.
- Employees must have worked at the company during any three of the preceding five years.
- Employees must have received at least $750 during 2024 and 2025 in compensation from the employer.
Is a SEP IRA account right for you?
SEP IRAs offer the benefits of an employer-sponsored plan to self-employed individuals without the complicated administration of a typical retirement plan. SEP IRAs don’t carry with them the same IRS reporting and recordkeeping requirements associated with more complex plans.
Tax Features and Investments
What are the tax features?
There are two ways to take advantage of the SEP IRA tax features:
- Employer contributions to a SEP IRA are tax-deductible to the employer.
- Employees may contribute to their SEP IRA. If you are self-employed, you can potentially make contributions to your SEP IRA both as an employer and as an employee to max out your tax benefit. Investments grow tax-deferred until you remove assets from your account.
Potentially lower tax rate
Another tax benefit of a Traditional IRA may come into play when you remove the assets in retirement. IRA distributions are taxed at your ordinary income tax rate during the year the money is withdrawn. This is the secondary benefit if your tax bracket is lower at this time as you may no longer be working.
Any IRA contributions that were not tax-deductible should not be taxable when withdrawn from your account.
How much can I invest?
The employer contribution to the account may not exceed the lesser of 25% of the employee’s compensation or $69,000 for 2024 or $70,000 for 2025.
The IRS sets the contribution limits to SEP IRA Accounts for employee contributions and these limits can change each year. In addition, if have reached age 50 on or before December 31 of the year in which the contribution is made, you may be eligible to contribute an additional amount called a “catch-up” contribution. Lastly, the participant can also make an annual IRA contribution up to $7,000 in 2024 and 2025. Individuals ages 50 and older can make an additional catch-up contribution of $1,000. The IRA contribution may not be deductible. However, your IRA contribution can’t exceed your earned income for that tax year.
| Contributions | 2024 and 2025 |
| SEP IRA Limits | $7,000 |
Individuals age 50 and older:
A catch-up contribution of $1,000 in tax year 2024 and 2025 may be available.
Source: www.irs.gov
What are the investment minimums?
There is no investment minimum to open the account. Subsequent employee contributions must be at least $50 unless establishing an automatic investment, which can be done for as little as $50.
What happens if I invest too much?
Investments made to an IRA or retirement account that are above allowable limits are called excess contributions. This can also happen if you were ineligible to contribute in the first place. In either scenario, excess contributions may be subject to additional taxes or penalties.
There may be several methods to remedying an excess contribution, but it’s always best to consult a certified tax advisor to find which solution works best for your situation. Contact us to learn about your excess contribution options with Janus Henderson.
Are there any investment deadlines?
Employer Contributions
The deadline for employer contributions depends on the tax year in which the SEP IRA is maintained. For example, if the SEP IRA is maintained on a calendar year basis, the employer deducts the yearly contributions on their tax return for the year within which the calendar year ends.
An employer may also file their tax return and maintain the SEP IRA using a fiscal year or short tax year.
In essence, Janus Henderson will accept the employer’s contribution based on the due date of the employer’s return (including extensions). Janus Henderson will report all employer contributions in the year they are received even if the contribution is for a prior year (see IRS instructions for forms 1099-R and 5498).
Employee Contributions
Employees can contribute to a SEP IRA with contributions for a specific tax year starting January 1 of that year and you must make all contributions for the tax year by the tax filing deadline, which is typically April 15 of the following year.
Generally, employees cannot make contributions after that date even if filing for an income tax extension.
What are the fees for a SEP IRA?
There is no cost to open an account and no annual maintenance fees when account minimum thresholds are met.
Withdrawals and helpful information
How do I request an account withdrawal?
Depending on the account options you have selected, you may redeem shares by telephone, online or in writing.
Generally, withdrawals from a SEP IRA are taxable. There are no penalties on withdrawals after age 59½. Withdrawing prior to age 59½ may result in a 10% early withdrawal penalty and is taxed as current income.
If you need to withdraw assets prior to age 59½, check to see if any of these exceptions to the penalty apply.
Am I required to take money out of the account?
Yes, this is called a Required Minimum Distribution (RMD). If you turn age 73 by the end of the calendar year, you must take your first RMD by April 1st of the following year.
Failing to take your RMD could trigger a 25% (or 10% if corrected in a timely manner) excess accumulation penalty from the IRS on the amount of RMD not distributed.
However, if the employee is still working, employer contributions can continue until there’s no longer any compensation from work.
What other information might be helpful to know?
The employer must have a formal written agreement in place to provide benefits to all eligible employees under the SEP IRA. The employer can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP.
SEP contributions made to the common-law employees may be deducted on the employer’s tax return. However, sole proprietors and partners may deduct contributions for themselves on Form 1040. Therefore, sole proprietors and partners can’t deduct as a business expense contributions made to a SEP IRA for themselves, only those made for their common-law employees. For more information, read IRS Publication 560.
The Janus Henderson Universal IRA Disclosure Statement and Custodial Agreement provides more details about IRA accounts at Janus Henderson.
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