Revised Limitations and Guidelines for Contributions to Simplified Employee Pension (SEP) IRAs
If you're an independent contractor or run a tiny company, a SEP IRA could be a brilliant retirement saving option. SEP stands for Simplified Employee Pension, while IRA is labeled as Individual Retirement Account. A Simplified Employee Pension Plan bears similar benefits to a 401(k) plan but with less administrative hassle.
A SEP IRA functions similarly to a standard IRA in serving as a tax-deferred account. When withdrawing from a traditional SEP IRA, you'll pay taxes and also incur a 10% penalty for withdrawals before reaching the age of 59 1/2. Alternatively, choose a Roth SEP IRA, which requires post-tax contributions, yet offers tax-free retirement withdrawals.
Only employers can institute SEP IRAs. Since you're contributing to a SEP IRA as your own employer, you'd be considered an employer in this context. The SEP IRA plan is ideal for independent contractors and small businesses with few employees, as employers must contribute equally to their own and eligible employees' SEP IRAs.
Contribution Limits
SEP IRA Contribution Limits
Your maximum allowable contribution for a SEP IRA is capped at the lesser of these two figures:
- 25% of your salary
- $69,000 in 2024, $70,000 in 2025 for eligible employees
Employees
If your employees meet certain criteria, you must contribute the same percentage of your salary to your SEP IRA as you do to theirs. Eligible employees are those who:
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- Are 21 years old or older
- Have worked for you for at least three of the previous five years
- Earn at least $750 annually in 2023, 2024, and 2025
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SEP IRA Contribution Limits for 2024 and 2025
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| Minimum contribution | 2024 Maximum contribution | 2025 Maximum contribution || --- | --- | --- || Employees | $0 | $0 | $0 || Employers | No minimum dollar amount; requires contribution parity between employer and employee | Lesser of 25% of salary or $69,000 | Lesser of 25% of salary or $70,000 || Self-employed | $0 | Typically the lesser of ~20% of gross income or $69,000 | Typically the lesser of ~20% of gross income or $70,000 || S corporation | No minimum dollar amount; requires contribution parity between employer and employee | Lesser of 25% of salary or $69,000 | Lesser of 25% of salary or $70,000 |
You can still fund a SEP IRA even if you maintain a traditional or Roth IRA, but catch-up contributions are not eligible. If your business sponsors another retirement plan, like a 401(k) or a profit-sharing plan, your total contributions to all employer-sponsored investment accounts should not surpass $69,000 in 2024 or $70,000 in 2025.
Employers
The maximum allowable contributions for SEP IRAs are significantly higher than those associated with traditional IRAs and Roth IRAs, making them an attractive option for the self-employed.
No dollar-amount minimum; percentage parity required between employer and employee contributions
Calculating Your Contribution
Lesser of 25% of salary or $69,000
How to calculate your SEP IRA contribution
Lesser of 25% of salary or $70,000
You can easily determine your maximum allowed SEP IRA contribution if you utilize an IRS W-2 form for salary payments. However, if you're self-employed or a freelancer without a salary, determining your maximum allowable SEP contribution can be more complex. Nonetheless, in most cases, it tends to equal a little less than 20% of your gross income.
Using a W-2 salary number, calculate your maximum allowed contribution by multiplying your salary by 25%. Since your contribution limit is that number or $69,000 for 2024 and $70,000 for 2025, with the lesser contribution amount being applicable. Contribute the same percentage on a percentage of salary basis to the SEP IRA of each eligible employee.
Self-employed
People who are self-employed and receive income on a contract basis can estimate their salary by calculating their net income from self-employment. Your net self-employment income is your gross income minus your business-related expenses, including any business-related costs and self-employment taxes. Multiply your net self-employment income by 25% to determine your maximum allowable SEP IRA contribution limit. In most cases, your maximum allowed contribution equates to slightly less than 20% of your gross income. Your contribution can't exceed $69,000 in 2024 or $70,000 in 2025.
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Contribution percentages, as long as they match, are allowed to vary from year to year. If you're experiencing financial difficulties, you can contribute 0%.
Usually the lower of ~20% of gross income or $69,000
Deadline
Usually the lower of ~20% of gross income or $70,000
When is the SEP IRA contribution deadline?
The annual deadline for SEP IRA contributions is April 15. You have until April 15 each year to contribute up to the maximum permissible amount to your SEP IRA for the previous year.
S corporation
Is it Right for You?
No dollar-amount minimum; percentage parity required between employer and employee contributions
The biggest drawback of a SEP IRA, for employers
Lesser of 25% of salary or $69,000
The main disadvantage of a SEP IRA, as an employer, is the requirement for percentage-of-salary contributions that must match those of employees. This disadvantage is essentially nonexistent if you don't have any employees or if you have a few low-paid employees or employees who do not meet the eligibility requirements.
Lesser of 25% of salary or $70,000
Is a SEP IRA Suitable for You?
Whether a SEP IRA fits your needs largely depends on the type and scale of your business. If you have only a few eligible staff members, SEP IRAs could be appealing due to their simplicity and the broad spectrum of investments they allow.
Compared to 401(k) plans, SEP IRAs are relatively straightforward to set up and manage. Most financial institutions have straightforward procedures in place, like completing IRS Form 5305-SEP, to establish SEP IRA accounts. Once you've set up personal accounts for yourself and your workers, each person is responsible for managing their own account.
Moreover, SEP IRAs allow you to purchase and sell a wide selection of investments, usually far greater than what's offered by other employer-sponsored retirement plans. This flexibility can be appealing to many potential investors.
Connected Retirement Concepts
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After contributing to a SEP IRA, you might need to consider other retirement savings options, such as a Roth IRA, which offers tax-free retirement withdrawals but requires post-tax contributions. (finance, retirement, money)
If you're a self-employed individual, the maximum allowable contribution for a SEP IRA is typically the lesser of 25% of your gross income or the specified dollar amount, which increases each year. (finance, retirement, money)
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