Simplified Employee Pension (SEP) FAQs

These Frequently Asked Questions are not intended as tax advice.  Please consult a tax professional.

How is a SEP funded?

• The employee opens a SEP IRA, to which employer contributions are deposited. Contributions are never withheld from pay or made by employees (other than the self-employed person). Contributions are not given directly to the employee, but are sent to the employee’s IRA custodian. The employee is immediately and fully vested.

How much can be contributed to a SEP IRA?

• A SEP allows a self-employeed individual contribute more to a retirement account than the current limits on 401(k) and IRA.  For a sole-proprietor, the maximum contribution is 25% of the net income from his or her business, up to $49,000.  If a small business owner allocates a specific amount of cash flow to salaries, the maximum SEP contribution is 25% of compensation, up to $49,000.

Can SEP contributions be deposited into a Roth IRA?

• No, but the employee participant may convert the SEP IRA into a Roth and pay the tax due on the conversion.

What is the deadline for establishing and funding the SEP?

• The plan must be established and the contributions completed by the employer’s tax-filing deadline, including extensions, following the tax year for which the deduction is taken.

Can a self-employed person establish and fund a SEP for himself or herself?

• Yes. The contribution limit is the lesser of 25% of net income from the business (usually reported on Schedule C) or $49,000.

Are there age restrictions for SEP participation?

• An employer is not required to include an employee who is under 21 years old. There is no upper age restriction.

For more information about IRAs, refer to IRS Publication 590 or talk to a financial or tax professional.