SEP Contributions For Employees: Understanding The Basics

Shawn Plummer

CEO, The Annuity Expert

The SEP-IRA is a retirement fund for self-employed people and small business owners. SEPs are a great way to save money for the future because you can contribute up to 25% of your income yearly. This guide will discuss SEP contributions for employees.

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What Is a SEP IRA for Employees?

An employer-sponsored retirement account called a SEP IRA enables business owners and self-employed individuals to defer up to $66,000 per year or 25% of their employees’ compensation in 2023. Only the company may contribute to a SEP IRA and must make proportional contributions to all full-time workers.

Set up a SEP-IRA for each employee

A SEP-IRA must be established for each eligible employee. All SEP contributions must go to traditional IRAs. Employees are responsible for managing their investments in a SEP-IRA account.

You and your employees will receive statements from the financial institutions investing your SEP contributions yearly, at least once a year. In addition, each institution, bank, or insurance company must provide a simple-language description of any fees and commissions it charges on withdrawals of SEP assets before the expiration of a stated period.

When can you set up a SEP plan?

You may establish a SEP for a year until your company’s income tax return deadline for the year you wish to set up the plan.

Participating in a SEP Plan

A qualifying employee is someone who meets the following requirements:

  • The employee has reached the age of 21.
  • An employee has worked for the employer for at least 3 of the last five years.
  • During the year, the employee received at least $750 from my employer for 2022.

An employer can exclude the following employees from a SEP or SARSEP:

  • Employees covered by a union contract and whose retirement benefits were negotiated in good faith by the union.
  • Employees who are nonresident aliens and do not derive their pay, wages, or other personal services compensation from their employer

Employer SEP Contribution Limits

Employer contributions to a participant’s SEP-IRA can’t exceed the lesser of:

  • 25% of the employee’s compensation, or
  • $56,000 for 2019
  • $57,000 for 2020
  • $58,000 for 2021
  • $61,000 for 2022
  • $66,000 for 2023

Contributed too much? Fix it here.

Sep Ira Limits 2023

What are the SEP contribution rules?

Employer contributions for each eligible employee:

  • Must be based only on the first $330,000 of compensation (2022)
  • Have the same percentage of salary for every employee
  • Be limited to the lesser of $61,000 for 2022 or 25% of compensation annually
  • Only paid to the employee’s SEP-IRA.

How much can I contribute to my SEP IRA? (Self-Employed)

As a self-employed person, you may contribute up to 25% of your earnings to a SEP retirement account. The maximum amount you can contribute is $61,000 (2022) and $66,000 (2023) per participant. 

When calculating your SEP-IRA contributions, take away the following deductions from your self-employment net earnings:

  • one-half of your self-employment tax and
  • contributions to your own SEP-IRA.

For more information on the deduction limitations for self-employed individuals, see Publication 560.

Do I have to contribute to my employee’s SEP IRA plans every year?

You do not have to make a yearly contribution. However, you must contribute to the SEP-IRAs of all participants who performed personal services during the year for which contributions are made, even if they die or leave employment before the contributions are made.

Do the employees or employers own SEP contributions?

The employee owns SEP Contributions.

What are the basic withdrawal rules for a SEP IRA?

  • You can take money out of your SEP-IRA whenever you want. But you might have to pay extra taxes (ordinary income tax plus 10%) if you take it out before 59½. This is called an “early withdrawal penalty” You can also roll over the money into another qualified retirement savings plan tax-free.
  • Required Minimum Distributions (RMD) rules apply to SEP-IRA contributions and earnings.
  • Employees can not take loans against a SEP IRA.
  • Additional rules:

SEP IRA Age Limit

SEP IRA participants must be at least age 21 with no maximum age limits. However, participants have to start taking RMDs starting at age 73.

SEP IRA Contribution Deadline

A SEP-IRA can be established for the prior year, and contributions made through April 15 or October 15 of that year. Likewise, you may fund the account and contribute until April 15 or October 15 of the following year.

SEP IRA Rollovers

Individuals may roll over their SEP-IRA into most IRAs, qualified plans, and annuities.

Alternatives to SEP IRAs

The Benefits of Deferred Annuities

  • Grow employee’s savings with protection against a stock market crash
  • Employers can utilize bonus annuities to mimic a 401k contribution match.
  • No contribution limits on nonqualified annuities
  • Employers can guarantee an income for life for their employees

Approaching Retirement Age

Employees can’t touch their SEP IRA plans without a penalty until they’ve reached the age of 59½ years. At that time, a SEP plan owner can roll over their retirement savings plans into a deferred annuity with a lifetime income rider. The annuity will then equally distribute a percentage of the retirement account for the rest of the retiree’s or married retirees’ lifetimes, even after the account has run out of money.

SEP IRA Calculator

Annuities are the only retirement plan in the United States that guarantees you never run out of money in retirement. Annuities can also show you how much savings you need to generate your desired retirement income in the future. Our SEP IRA withdrawal calculator illustrates how much annual income you can receive for the rest of your lifetime.

Next Steps

If you’re nearing retirement age, it’s essential to start thinking about your options for withdrawing money from your SEP IRA. You can either take distributions periodically or roll over your plan into a deferred annuity that will provide lifetime income payments. Contact us today for a free quote on how much this type of annuity could cost you each month. Then, we’ll work with you to find the best option for your unique retirement needs.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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