Self-employed workers and small-business owners who want an easy and inexpensive retirement plan should consider a Simplified Employee Pension IRA, or SEP IRA for short. Savers are also allowed to stash away more for retirement with a SEP IRA compared to an employer-sponsored 401(k) plan.
SEP IRA Contribution Limits for 2021
For 2021, a self-employed business owner effectively can salt away as much as 25% of his or her net income in a SEP IRA, not to exceed the maximum contribution limit of $58,000. (That's up from the maximum in 2020.) In comparison, a traditional IRA limits contributions to $6,000 for 2021 for those younger than 50, or $7,000 for those 50 or older thanks to a $1,000 "catch-up" contribution.
SEP IRAs are available for a variety of small-business types, including sole proprietorships, partnerships, limited liability companies, S corporations and C corporations. The plans can be an especially attractive option for a small business with few employees.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There's a twist, however, when it comes to SEP IRAs. Unlike some other retirement plans, a SEP IRA allows only the employer to contribute. And whatever percentage of compensation employers set aside in the plan for themselves is the same percentage of pay they must contribute for each eligible employee.
To be eligible to participate in an employer's SEP IRA, employees must be at least 21 years old, have worked at the business for three of the past five years and have earned at least $650 from the job in 2021.
SEP IRAs vs. Traditional IRAs
SEP IRAs follow many of the same rules as traditional IRAs. You generally must be at least 59 1/2 to take withdrawals from the account without paying a 10% penalty.
And once you turn age 72, you will have to start taking required minimum distributions (RMDs). You have until April 1 of the year after you turn 72 to take your first required minimum distribution, but after that you must take RMDs by December 31 of each year (even if you took your first RMD on April 1 of that same year).
Since employers make the contributions, not employees, catch-up contributions for retirement savers 50 and over are not permitted in SEP IRAs.
A SEP IRA is easy to open and widely available at financial institutions that offer individual retirement accounts. A business owner must first complete an application with a brokerage or investment company such as Fidelity, Vanguard or Charles Schwab, says Todd Youngdahl, a certified financial planner in Falls Church, Va. This type of account allows business owners to develop an investment strategy and portfolio with many choices for investments, including mutual funds, exchange-traded funds and individual stocks, at little operational cost, he says.
"In most cases, there is no set-up fee for a SEP IRA and no annual custodial or maintenance fee," Youngdahl says.
A SEP IRA would be a good option for someone with a side gig outside of his or her regular job, says Mark Beaver, a CFP in Dublin, Ohio. It would allow the worker to contribute fully to his or her employer's 401(k) and use the SEP IRA for self-employment income, Beaver says.
-
AI Goes To SchoolThe Kiplinger Letter Artificial intelligence is rapidly heading to K-12 classrooms nationwide. Expect tech companies to cash in on the fast-emerging trend.
-
Where to Invest in an Uncertain MarketIn an uncertain market, you can still pocket juicy payouts ranging from 4% to 14%, depending on risk.
-
What Does Medicare Not Cover? Eight Things You Should KnowHealthy Living on a Budget Medicare Part A and Part B leave gaps in your healthcare coverage. But Medicare Advantage has problems, too.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025. That's good news for state and local government employees.
-
13 Smart Estate Planning Movesretirement Follow this estate planning checklist for you (and your heirs) to hold on to more of your hard-earned money.
-
Medicare Basics: 12 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2025SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $70,000 in 2025, up from $69,000 in 2024.
-
Roth IRA Contribution Limits for 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2025simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
