SEP IRA Contribution Limits for 2021
The maximum SEP IRA contribution is higher this year than it was for 2020.
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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.

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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.
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