Boasting a high contribution limit and low administrative fees, Simplified Employee Pension plans (SEP IRAs) can help employees and the self-employed save and invest for retirement. Here's how to figure out how much you can save in your own and your employees' SEP IRAs in 2024 and 2025.
SEP IRA contribution limits for 2024
The SEP IRA contribution limitOpens in a new window for 2024 is 25% of eligible employee compensation, up to $69,000. It's important to note that employees cannot make SEP IRA contributions on their own behalf. Instead, employers decide how much to contribute and make all contributions on behalf of their employees.
If you're self-employed, this means that on paper any contributions made to your SEP IRA are from your business, not from you as an employee of that business. As a self-employed individual, your contributions are based on your net earnings from self-employment, which is your gross income from your business minus allowable deductions. Adjusting your net earnings for the purpose of determining SEP IRA eligible contributions and deductions can be complex, so consider consulting a tax professional.
SEP IRA contributions are made by the employer (you as a business owner) rather than by individuals, and contribution amounts are determined by the business, subject to IRS limits. Depending on your SEP IRA plan, however, you (as an individual) may be able to make additional individual contributions up to the IRA contribution limit each year—which is $7,000, or $8,000 if you're over age 50, for tax year 2024—so long as your total contributions are under the IRA annual contribution limit.
Keep in mind that this individual IRA contribution limit is cumulative across all IRA accounts, but it doesn't include contributions an employer makes on your behalf to a SEP IRA. So, for example, if you contribute the maximum individual limit of $7,000 to your IRA in 2024, you're ineligible to contribute to other IRA accounts that tax year. If you're self-employed, you must have sufficient net earnings from your business to make SEP IRA contributions and sufficient earnings as an individual to contribute to a traditional IRA. Self-employed earnings calculations and the interactions of self-employed and individual elements can be complex, so consider consulting with a tax professional.
SEP IRA contribution limits for 2025
The SEP IRA contribution limitOpens in a new window for 2025 is 25% of eligible employee compensation, up to $70,000. It's important to note that employees cannot make SEP IRA contributions on their own behalf. Instead, employers decide how much to contribute and make all contributions on behalf of their employees.
If you're self-employed, this means that on paper any contributions made to your SEP IRA are from your business, not from you as an employee of that business. As a self-employed individual, your contributions are based on your net earnings from self-employment, which is your gross income from your business minus allowable deductions. Adjusting your net earnings for the purpose of determining SEP IRA eligible contributions and deductions can be complex, so consider consulting a tax professional.
SEP IRA contributions are made by the employer (you as a business owner) rather than by individuals, and contribution amounts are determined by the business, subject to IRS limits. Depending on your SEP IRA plan, however, you (as an individual) may be able to make additional individual contributions up to the IRA contribution limit each year—which is $7,000, or $8,000 if you're over age 50, for tax year 2024—so long as your total contributions are under the IRA annual contribution limit.
Keep in mind that this individual IRA contribution limit is cumulative across all IRA accounts, but it doesn't include contributions an employer makes on your behalf to a SEP IRA. So, for example, if you contribute the maximum individual limit of $7,000 to your IRA in 2024, you're ineligible to contribute to other IRA accounts that tax year. If you're self-employed, you must have sufficient net earnings from your business to make SEP IRA contributions and sufficient earnings as an individual to contribute to a traditional IRA. Self-employed earnings calculations and the interactions of self-employed and individual elements can be complex, so consider consulting with a tax professional.
Who's eligible to contribute to a SEP IRA?
Business owners can establish SEP IRAs to save for their employees' retirement, even if they're also the business owner, provided they're compensated as an employee or they're self-employed and the only employee of the business. If a business has multiple employees and elects to establish SEP IRAs, it's required to set up accounts for everyone who's eligible.
Employers set the eligibility criteria, provided that it's no stricter than the following. To be eligible, an employee must:
- Be age 21 or older.
- Meet the 3-of-5 rule, meaning you've been employed, full time (not as a contractor), by the company for any period of time during at least 3 of the last 5 years.
- Earn at least the minimum annual compensation from the SEP IRA-sponsoring employer. For 2024 and 2025, this is $750.
Employers can elect less strict criteria, including that all employees are eligible as soon as they earn compensation from the business.
Notably, the percentage of income contributed to a SEP IRA must be the same across all eligible employees, including the owner. There's no requirement or obligation for the business owner to make contributions each year, though, assuming they don't contribute to their own company-associated SEP IRA during that period.
Additionally, your company may exclude the following from its SEP IRA:
- Those covered by a union collective bargaining agreement for retirement benefits.
- Those who are not US residents and do not receive US wages.
What happens if your employer contributes too much to your SEP IRA?
If you (as a self-employed individual) or your employer overcontributes to your SEP IRA, you may be subject to taxes and penalties as excess contributions are considered part of your gross income and these contributions may be nondeductible for the business.
You have more than one option for correcting a SEP IRA excess including using the IRS Employee Plans Compliance Resolution System (EPCRS). You should consult a tax advisor to discuss the best option for your correction.
If you or your company doesn't correct the mistake by the tax filing deadline, the excess contributions may be subject to costly IRS tax penalties.
How much should you contribute to your SEP IRA?
If you're not the business owner sponsoring a SEP IRA, you likely have no control over how much is contributed to your SEP IRA. But if you're self-employed or the owner of a small business offering SEP IRAs, you have a decision to make. Although contributions to your SEP IRA reduce your business's (or company's) tax liability and boost your and your employees' retirement savings, it may be challenging to balance today's business priorities with future savings.
As an individual, Fidelity suggests saving at least 15% of your pretax income for your retirement each year. This guideline includes contributions across all retirement accounts, including other IRAs, and 401(k)s or 403(b)s. It also includes any employer contributions to retirement plans.
SEP IRA FAQs
What is the deadline to contribute to your SEP IRA?
A SEP IRA plan for a given year must be established by the due date of the sponsoring business's income tax return for that year, with extensions if applicable. All contributions must be deposited by the same date to be considered deductible for the year.
If you have a SEP IRA, can you contribute to other retirement accounts?
Yes, you can contribute to other retirement accounts on top of your employer's contributions to your SEP IRA. If you're employed by multiple businesses, it's possible to have both a SEP IRA and a 403(b), 401(k), or even another SEP IRA. Be mindful if you're the owner of multiple businesses sponsoring different plans: You may have to aggregate contributions when determining limits and making contributions to employee accounts.
Are contributions to SEP IRAs automatically invested?
No, you must choose to invest the contributions to your SEP IRA based on the menu of investment options available in your SEP IRA plan.
Can you roll over a SEP IRA?
Yes, you can roll over funds from a SEP IRA into other qualifying IRAs, such as traditional IRAs. You can also convert SEP IRA funds into a Roth IRA, although this may require paying taxes on the money you convert.
It's important to consult a tax professional before completing any SEP IRA Roth rollovers or conversions to avoid unexpected tax burdens. Rolling over or performing a Roth conversion may require you to transfer your SEP IRA funds into a new brokerage.
Can you deduct SEP IRA contributions from your taxes?
Contributions to a SEP IRA up to the annual limit are tax-deductible for the employer and aren't subject to federal income tax for the employee, until such time as distributions are made from the IRA. Self-employed individuals can typically deduct the entirety of their allowable SEP IRA contributions.
How are SEP IRA withdrawals taxed?
Those making SEP IRA withdrawals after age 59½ may incur applicable income taxes on what they take out. Remember: The money held in a SEP IRA is like that held in a traditional IRA and hasn't yet been subject to taxation.
Withdrawals made before the employee is 59½, however, may be subject to a 10% early withdrawal penalty in addition to any applicable income taxes, barring a few exceptions.