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SEP-IRAs: Retirement Plans for Self-Employed and Small Business Owners

SEP-IRAs: Retirement Plans for Self-Employed and Small Business Owners

February 23, 2023

If you're a small business owner or sole proprietor, you may be one who manages it all: sales, marketing, customer service, billing, and quality control. Planning for retirement can get lost in the shuffle.

Opening a SEP-IRA is a simple option for the self-employed and small business owner to start building a secure financial future. A SEP (Simplified Employee Pension) IRA offers high annual contribution limits, and getting started requires minimal paperwork. For the time-pressed, this can be an easy option for small businesses with or without employees. 

Are You a Sole Proprietor, Independent Contractor, or Freelancer?

  • A SEP-IRA can give you the flexibility to increase or decrease contributions according to fluctuating income levels.

  • You can contribute up to 25% of your annual income, up to $61,000 for the 2022 tax year (contributions can be made until April 15th, 2023, or the extension date, if applicable). For the 2023 tax year, it goes up to $66,000, and again, you can make contributions until the following April or the applicable extension date.

  • Your contributions are tax-deductible.

  • Just like traditional IRAs, SEP-IRAs are federal tax-deferred; meaning dividends and capital gains are shielded from federal taxes until funds are withdrawn.

Are You a Small Business Owner?

  • A SEP-IRA may also be a good option for those businesses with up to 100 employees.

  • You, as the employer, are not locked into contributing each year, and you can decide whether and how much to contribute to employees' accounts. But, as an employer, you must contribute for all eligible employees at the same percentage of compensation for each.

  • SEP-IRAs offer a streamlined administration plan, meaning there are no plan tax filings with the IRS.

Small Business Owner Retirement Plan Options´╗┐

What If You Already Have a Traditional IRA or Roth IRA?

You can participate in a SEP-IRA plan even if you already contribute savings to a Traditional IRA or Roth IRA. Keep these points in mind:

  • Participating in a SEP-IRA means that you are covered by a retirement plan at work. This can impact how much can be deducted from a Traditional IRA´╗┐. The amount of a Traditional IRA contribution that is deductible depends on your modified AGI for the year.

  • Eligibility for Roth IRAs is also based on modified AGI for the year.

  • Self-employed persons can lower their AGI by funding a SEP-IRA. Thus it may be possible to lower AGI enough to be eligible for Roth IRAs or deductible Traditional IRAs.

  • Self-employed persons can potentially contribute to a Traditional IRA and/or Roth IRA and/or SEP-IRA for the year. This provides flexibility when deciding how much to contribute to each type of retirement plan.

The SEP-IRA Contribution Deadline

It does give you some flexibility, but don't wait too long. A new account must be opened prior to your tax return due date, which, for individuals, is generally April 15th. If you file an extension with the IRS, you may be able to make a contribution or open a new account as late as October 15th of 2023.


Taking a Closer Look at SEP-IRA Due Dates

Let us know if you have questions about eligibility, benefits, or want help with setting up a SEP-IRA before the April 15th deadline. If you would like to find out which type of small business retirement plan best suits your own retirement and business goals, please use this link to schedule a quick call