Why SEP IRAs Make Sense for Small Business Owners
By James Blake, VP, ADP Broker-Dealer Operations in ADP's Small Business Retirement Services group
A SEP IRA offers small business owners and self-employed individuals a simple, flexible way to save for retirement—with high contribution limits and upfront tax benefits. They are easy to set up and can scale with your business.
A SEP (Simplified Employee Pension) is a retirement plan designed for small business owners. SEPs are one way for small business owners, their employees, and self-employed individuals to build savings while receiving tax benefits similar to those of a large workplace retirement plan. Here are some SEP IRA benefits and information on when these plans may make sense.
How an SEP IRA works for business owners
To get started with a SEP IRA, the small business owner opens an account with an investment broker or retirement plan provider, similar to opening an individual retirement account (IRA).
The small business owner decides what percentage of their annual earnings to contribute to the plan. In 2025, business owners can contribute 25% of their total earnings or $70,000 maximum, whichever is lower.
They receive an upfront tax deduction for the contribution. The business owner can then invest their SEP IRA balance between the investments available at the plan provider, including stocks, bonds, mutual funds, and other assets. The SEP IRA delays taxes on the gains as long as the money stays in the account.
Employee rules for SEP IRAs
If the small business owner has employees, they must also make contributions for them every year. The contributions must be uniform, usually following the same percentage. For example, if a business owner contributes 10% of their compensation into a SEP IRA, they must also contribute 10% of each employee's salary into their own SEP IRA.
The employees then invest the SEP IRA contributions in their accounts. SEP IRAs do not have vesting, and as soon as employees receive contributions, that money is theirs to keep after leaving the small business. Employees cannot contribute to an SEP IRA. All money must come from their employer.
Withdrawals and loans
Small business owners and employees can begin SEP IRA retirement withdrawals at age 59 ½. Because these accounts are funded pre-tax, retirement withdrawals are taxed as income.
A small business owner and employees could take money out of a SEP IRA before retirement. However, they will owe an additional 10% early withdrawal penalty plus income tax on the entire amount. Certain early withdrawal exceptions avoid the penalty, such as withdrawals due to a disability or to pay health insurance premiums while unemployed. SEP IRAs do not allow loans for temporary access. The small business owner can only take money out through withdrawals.
SEP IRAs require minimum distributions starting at age 73. The account holder must begin taking out enough money to meet these requirements or else they will owe a penalty.
Potential SEP IRA benefits
High contribution limits: A SEP IRA allows small business owners to save far more per year for retirement than an IRA. In 2025, an IRA only allows contributions up to $7,000 for people younger than 50 and $8,000 for people 50 or older.
Tax benefits
As noted, SEP IRAs offer an upfront tax deduction for contributions and tax-deferred growth for investment earnings to help small business owners build retirement savings.
Flexible contributions
Small business owners can decide what percentage each year to contribute to a SEP IRA, and can even skip contributing during a year when funds are tight. This includes contributing on behalf of employees.
Simple setup and administration
SEP IRAs do not require a lengthy application process or annual IRS filings. Small business owners could also receive a tax credit for the initial costs under the SECURE Act 2.0.
SEP IRAs vs. other small business savings plans
Small business owners should compare these other savings plans against SEP IRA benefits to decide which is the right fit.
Roth SEP IRAs
Roth SEP IRAs operate similarly to traditional SEP IRAs except they are funded with after-tax dollars. Business owners do not get an upfront deduction for their contributions. At retirement, both contributions and investment gains can be withdrawn without incurring federal income tax, provided distribution requirements are met.
Contributions to Roth SEP IRAs can be withdrawn early without incurring income taxes or penalties, and the accounts are exempt from required minimum distributions in retirement. Business owners should consider whether they need the tax benefits now with a traditional SEP IRA or if they prefer to see the tax benefits at retirement through a Roth SEP IRA.
SIMPLE IRAs
A SIMPLE IRA allows both employers and employees to contribute to the plan. Employers must contribute on behalf of their employees each year. However, the amount they must contribute is smaller than a SEP IRA. They must contribute either a dollar-per-dollar match of employee contributions up to 3% of their annual salary or 2% for each employee's salary, regardless of whether the employee contributes.
A SIMPLE IRA may make sense if a small business owner has more employees because they contribute a smaller salary percentage per account, versus the higher possible percentage with a SEP IRA for business owners.
Solo 401(k)
A solo 401(k) is a simplified version of a 401(k). It's less expensive with less administrative work to set up. It has high contribution limits like an SEP IRA. However, a solo 401(k) only covers one person, and a small business owner could not use this plan if they hire employees.
Given its versatility compared to other retirement savings plans, a SEP IRA may be a good fit for small business owners and self-employed workers. To learn more, contact an ADP retirement planning services specialist to discuss your retirement plan options or call (800) 432-401K.
*Registered representative of ADP Broker Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 and Associated person of ADP Strategic Plan Services, LLC (SPS) an SEC Registered Investment Adviser. Registration does not imply a certain level of skill or services.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
M-606564-2024-09-16
