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Small Business Owners and a SEP Plan

Updated: Apr 14, 2023

If you are a small business owner or are self-employed, you may be wondering what options you have to save yourself from having to pay lots in taxes or how to save for retirement. The good news is you can be doing both by setting up a Simplified Employee Pension (SEP) plan for yourself and your employees. This plan is easy to set up and maintain. There are no plan filings with the IRS thereby making plan administration simple and cost efficient.

The benefits of a SEP IRA include:

  • Reducing taxes with deductible contributions

  • Maximizing savings through contribution limits

  • Taking advantage of flexible funding

  • Tax-deferred compounding

  • Easy to set up and administer

SEP IRA contributions are made by the employer, on a pre-tax basis. That means that account holders do not have to pay taxes on the money they contribute to their SEP until they withdraw the money from their account during retirement age. The annual contribution one can make is higher than the standard IRAs and 401(k)s. A standard IRA only allows for contributions up to $6,000 per year. However, the contribution for a 2021 SEP can be up to the lesser of 25% of the employee's compensation or a maximum of $58,000. Having this contribution flexibility can help business owners save more money towards their retirement savings when business is going good.

SEP IRAs are treated like traditional IRAs for tax purposes and it allows the same investment options. They are 100% vested, and the account owners have flexibility in choosing their investment options. Earnings can also be rolled over tax-free to other retirement plans.

Overall, SEP IRAs help small businesses by providing employer-sponsored retirement plans to their employees and owners. It is most beneficial to account holders that expect to be in a lower tax bracket when retired. Being in a lower tax bracket during retirement saves you from having to pay lots of taxes on your investment income. Begin setting aside money to make contributions now, while saving money for your future.


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