Retirement plans, like simplified employee pension (SEP) IRAs, go hand-in-hand with attractive tax benefits. Designed for self-employed individuals and small business owners, SEP IRAs allow employers to directly contribute to their employees’ retirement accounts and their own. In return, they will receive a tax deduction. However, there are other tax benefits associated with this type of retirement plan. 

While traditional IRAs and Roth IRAs are established outside of the workplace, SEP IRAs are defined contribution plans that businesses of any size can set up for their employees. However, SEP IRAs are particularly attractive for small business owners and self-employed workers because of their simplicity and generous contribution limits.

Unlike a 401(k) plan, SEP IRAs are funded entirely by the employer – not the employee. These contributions, which should be an identical percentage of the salary for each worker, are immediately vested. 

SEP IRAs also come with higher annual contribution limits compared to traditional IRAs and their Roth counterparts. Because of these higher contribution limits, small business owners, self-employed individuals, freelancers and independent contractors can enjoy more substantial retirement savings. Plus, the simplicity and flexibility of a SEP IRA make it favored among small businesses with fluctuating profits.

The eligibility criteria for opening a SEP IRA is simple. The IRS stipulates that if you’re self-employed, a small business owner with at least one employee, a sole proprietor, part of a partnership, a corporation, or an S corporation, you can open a SEP IRA. These criteria help ensure that the benefits of a SEP IRA are accessible to diverse business structures.

The participation rules in a SEP IRA closely mirror its intuitive nature. Employees who are at least 21 years old, have been employed with the same employer for three out of the last five years and have received a minimum of $750 in compensation in the current year are considered eligible according to IRS guidelines. Keep in mind that as an employer, you can use less stringent eligibility requirements, but not more intensive ones. 

As mentioned above, SEP IRAs come with significantly higher contribution limits when compared with traditional or Roth IRAs. As of 2024, the maximum contribution is the lesser of 25% of the employee’s compensation or $69,000 (up from $66,000 in 2023). These figures, however, may be subject to change, making it important to stay updated on the recent regulations.