SEP IRA Rules for Business Owners with Employees

Learning SEP IRA rules can be very valuable as a business owner. Instituting a SEP IRA can provide you with a number of benefits for your company and your employees. Here are the basics of the SEP IRA and how you can administer one within the rules.

What Is a SEP IRA?

The term SEP IRA stands for simplified employee pension individual retirement account. A business owner can set up this type of account instead of a qualified plan like a 401(k). The business owner can decide to make contributions to the IRAs of their employees. These deductions are tax-deductible for the business, therefore, this provides a great incentive to help your employees save for retirement. The SEP IRA is typically regarded as much simpler than setting up a 401(k) for your business. You will have less paperwork to deal with and lower costs as well. This makes the SEP IRA a very attractive type of retirement account for those that qualify.

Qualification Rules

Before trying to set up a SEP IRA, you will want to make sure that you qualify. In order to qualify for this type of account, you must be either a sole proprietor, member in a partnership, the business owner of a corporation, or a charitable organization. You have to have one or more employees involved even if you are the only employee in the business.

Establishing the SEP IRA

In order to properly establish this type of account, you will have to adhere to the rules. When you decide to start this type of account for your employees, you have to come up with a written agreement that says you plan on making contributions to all of your eligible employees. You have to notify all of your employees that they can participate in this type of retirement program if they wish. You can come up with your own agreement or use a standard form that is provided by the IRS. You also have to have this written agreement submitted before your tax return is due.


You also need to make sure that you adhere to the rules associated with making contributions to employee accounts. Currently, an employer can provide as much as 25% of an employee's income into their SEP IRA. This amount has to be less than $49,000 in a particular year. The employer also has the right to do this at their discretion. Therefore, they might choose to not contribute to employees accounts during a particular year. There is nothing that says they have to contribute a certain amount if they choose not to. However, there is incentive for them to do so because it lowers their taxable income for the business.


The money that is placed into this type of account cannot be withdrawn before the age of 59 1/2. If it is withdrawn, a 10% early withdrawal fee will be imposed. Therefore, it is in the best interest of everyone if the money stays in the accounts until retirement.

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