SEP retirement plans

For sole proprietors and small businesses, SEP IRAs offer a powerful, low-maintenance way to save for retirement. They feature high contribution limits, flexible timing and simple setup, all without the complexity of larger retirement plans.

This guide breaks down how SEP retirement plans work, who they’re best for and how they compare to other options like Solo 401(k)s and Roth IRAs. Whether people are self-employed or leading a small company, SEP plans can help them build long-term security on their terms.

What is an SEP IRA? Simplified employee pension plan for small business owners

An SEP IRA, or simplified employee pension plan, is a retirement savings account for small businesses and self-employed individuals. It’s designed to be easy to set up, manage and scale — without the heavy administrative lift of traditional workplace plans.

Employers make tax-deductible contributions to each employee’s IRA, including their own if they’re self-employed. There are no annual filing requirements for the business, and employees are fully vested from day one.

Who can use the plan?

Self-employed pension plans like SEP IRAs are built for flexibility, making them a smart choice for many types of small businesses, including:

• Sole proprietors
• Partnerships
• Corporations
• Freelancers and contractors

Employee eligibility at a glance:

If a business has employees, the IRS sets a few simple rules for who must be included in an SEP IRA. In general, employees are eligible if they:

• Are at least 21 years old
• Have worked for the employer in three of the last five years
• Earn at least $750 in compensation this year

Employers can choose more generous eligibility terms but not stricter ones. Once an employee qualifies, employers must contribute the same percentage of pay for them as they do for themselves or anyone else on their team.

How does an SEP work?

The SEP IRA keeps things simple behind the scenes. Employers don't need to navigate complex forms, annual testing or heavy administrative processes.

Instead, they follow a few core steps: set up the plan, create individual accounts and communicate clearly with their team. Once the plan is running, contributions are flexible, and paperwork is minimal.

Setup steps for an SEP

To start an SEP IRA, the employer first chooses a financial institution to hold the accounts. From there, the employer establishes the plan and sets participation terms. There’s no need to file with the IRS, and there’s no annual reporting requirement.

Once the plan is in place, individual SEP IRA accounts are created for all eligible employees. Each account is funded by the employer with a uniform percentage of compensation, up to the annual contribution limit.

Written agreement

The IRS requires a formal written agreement to establish an SEP IRA. Most employers use Form 5305-SEP, a straightforward template provided by the IRS. This form outlines the basic rules of the plan, including eligibility, contribution formulas and timing.

Alternatively, businesses can adopt a prototype or custom SEP plan through a financial institution, which may offer additional features or integrations. Either way, the written agreement must meet IRS standards to qualify for tax benefits.

Provide information to participants

Employers must give each eligible employee key information about the plan, including a copy of the written agreement, notification of eligibility and details about how the SEP works.

Employees also have the right to know how contributions are calculated, how funds are invested and how withdrawals work. These disclosures are a critical part of compliance and a best practice for building trust with employees.

Set up an SEP IRA for each employee

SEP IRAs give participants control of their retirement savings from day one. Once eligibility is confirmed and the plan is in place, each eligible employee must set up a separate SEP IRA account. These accounts are owned and controlled by the employee, even though only the employer can contribute.

Most SEP plans are hosted by financial institutions that offer a range of investment options. ADP can help employers with plan setup and money movement.

SEP IRA contribution limits

SEP IRAs are built for simplicity, but they don’t skimp on savings potential. Employers can contribute significantly more than they could with traditional IRAs, which makes SEP plans attractive for high earners and fluctuating income years. However, there are clear rules about how much employers can contribute and who sets the pace.

SEP contribution

Big impact, simple formula. For 2025, employers can contribute up to 25% of each eligible employee’s compensation, capped at $70,000 per participant. These are employer-only contributions, meaning employees don’t make deferrals and catch-up contributions aren’t allowed — even for those over 50.

The SEP contribution is calculated the same way for every eligible participant, including business owners themselves if they qualify. This uniformity makes the plan easy to administer. It's also an important consideration if the workforce grows.

Individual contribution limits

Eligible employees can receive up to $70,000 in employer contributions in 2025, depending on their compensation. This total is significantly higher than the $6,500–$7,500 limits on traditional and Roth IRAs.

Compared to 401(k) plans, SEP IRAs don’t allow for elective deferrals or matching, meaning employers carry the full weight of contributions. They also have more control over timing and funding, which can be especially useful for seasonal or variable income.

Timing of setting up an SEP plan

SEP IRAs give business owners a rare advantage — they can set up the plan after the tax year ends and still make contributions for that year as long as they establish the plan prior to filing the company's taxes. This flexibility can be a game-changer during tax season, especially for sole proprietors or small business owners trying to optimize deductions.

When and where are contributions made?

SEP contributions must be made by the tax filing deadline, including extensions, which gives employers a valuable window to evaluate their finances before contributing to plans. For most filers, the due date is April 15, but extensions can push the deadline to October.

Contributions are made directly to each employee’s SEP IRA account through a financial institution. While there's no annual filing requirement for the employer, keeping detailed records of contributions, eligibility and plan documents is essential.

What are the contribution rules?

SEP IRAs are generous, but they come with structure. Contributions follow IRS rules on ownership, withdrawals and rollovers — similar to traditional IRAs but with a few important distinctions. Once funds hit an account, they belong to the employee, no strings attached.

Who owns SEP contributions?

All SEP contributions are subject to immediate 100% vesting, meaning the money belongs to the employee as soon as it’s deposited. There is no vesting schedule.

SEP IRA assets are also portable and can be rolled into another IRA or qualified retirement plan, subject to standard rollover rules. As such, employees can take the funds with them if they change jobs or retire.

What are the basic withdrawal rules?

SEP IRAs follow the same withdrawal rules as traditional IRAs:

• The funds can be withdrawn at any time, but early distributions (before age 59½) usually trigger a 10% penalty on top of regular income tax.
• The penalty has limited exceptions, such as first-time home purchases or qualified education expenses.
• Required minimum distributions (RMDs) start at age 73 (as of current IRS rules), even if the participant is still working.

Rollovers

Funds in an SEP IRA can be rolled into another IRA or qualified plan, such as a 401(k), without penalty if done correctly. Direct rollovers are tax-free, but taxes and penalties may apply if the account holder takes a distribution and waits too long to redeposit it.

The IRS allows 60 days to complete an indirect rollover. Beyond that, the funds are treated as a withdrawal. Staying within the window keeps the rollover clean and tax-deferred.

Investment choices

One of the biggest advantages of an SEP IRA is that the accounts are individually owned and participants can decide how their money is invested. A wide selection of investments is available. Participants can choose from mutual funds, ETFs, stocks, bonds and other options. The exact choices depend on the IRA provider selected.

SEP IRA vs. solo 401(k)

When it comes to retirement planning for the self-employed, SEP IRAs and solo 401(k)s are often the top contenders. Both offer tax-deferred growth, high contribution limits and flexibility but they’re structured very differently. The right choice depends on individual goals, income and whether the employer plans to hire employees.

Key differences

Feature	SEP IRA	Solo 401(k)
Who can use it	Self-employed, small businesses	Self-employed with no employees
Contribution structure	Employer-only	Employer + employee deferrals
2025 contribution limit	Up to 25% of comp, max $70,000	Up to $70,000 total (incl. deferrals)
Catch-up contributions	Not allowed	$7,500 catch-up (age 50+)
Employee eligibility	Must include eligible employees	Only for business owner + spouse
Administrative burden	Low	Higher (requires annual Form 5500-EZ)

When to choose an SEP IRA

An SEP IRA is ideal for employers who:

• Want simple setup and low maintenance
• Have employees or plan to hire them
• Want flexibility in how much to contribute each year

When to choose a solo 401(k)

A solo 401(k) is ideal for employers who:

• Are a one-person business with no employees
• Want to maximize contributions with salary deferrals
• Are over age 50 and want to make catch-up contributions

SEP IRA vs. traditional IRA vs. Roth IRA

While SEP, traditional and Roth IRAs are similar, they serve very different financial needs. The differences come down to who can contribute, how much they can contribute and how taxes are handled. Generally, SEP IRAs are well-suited for entrepreneurs who want to make large, flexible contributions, whereas traditional and Roth IRAs are better geared toward individuals focused on consistent, personal retirement savings.

Start with taxes

Each plan handles contributions and withdrawals differently.

• SEP IRA: Employer contributions are tax-deductible and grow tax-deferred. Taxes apply when funds are withdrawn in retirement.
• Traditional IRA: Individuals may deduct contributions depending on income and whether they participate in another retirement plan. Earnings grow tax-deferred and are taxed when withdrawn.
• Roth IRA: Contributions are made with after-tax dollars. Earnings grow tax-free, and qualified withdrawals are not taxed.

Consider how much to contribute

SEP IRAs allow for much larger contributions than other IRA products.

• SEP IRA: Up to 25% of compensation, capped at $70,000 for 2025 (employer contributions only).
• Traditional IRA: Individuals can contribute up to $7,000, or $8,000 if age 50 or older.
• Roth IRA: Same limits as a Traditional IRA, but contributions phase out at higher income levels.

Eligibility also matters

Some plans are built for business owners. Others are better for individual savers.

• SEP IRA: Ideal for self-employed individuals and small business owners. Employers make all contributions.
• Traditional IRA: Available to anyone with earned income. Deductibility depends on income and other retirement coverage.
• Roth IRA: Also available to individuals with earned income, though eligibility is capped for higher earners.

Think about long-term goals

Different plans serve different retirement strategies.

• SEP IRA: Best for business owners seeking high contribution potential and easy plan management.
• Traditional IRA: A good fit for individuals looking to lower their taxable income now and save steadily over time.
• Roth IRA: Great for younger earners or anyone expecting to be in a higher tax bracket later and values tax-free income in retirement.

Is an SEP right for me?

Employers looking for a retirement plan that’s flexible, powerful and easy to manage may find an SEP retirement plan to be the right fit. It offers high contribution limits, a straightforward setup and zero annual filing requirements. That simplicity can be a major advantage for sole proprietors and small businesses, especially when income fluctuates yearly.

An SEP IRA works best for business owners who don’t have employees or want to contribute on behalf of a small team. It can help them maximize savings while minimizing administrative overhead because unlike 401(k)s, SEP IRAs have no complex testing rules or ongoing plan management.

And with integrated retirement solutions from providers like ADP, it’s even easier to align retirement strategies with payroll, HR and benefits management. A modern, integrated benefits platform keeps everything connected so employers can focus less on paperwork and more on building their businesses.

Compliance Code:
M-766726-2025-07-09

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