SEP IRA

What does SEP IRA stand for?

              SEP IRA stands for Simplified Employee Pension Individual Retirement Account.  The SEP IRA was created in 1978 as part of the Revenue Act of 1978.  This retirement vehicle was than formally defined under the Small Business Job Protection Act of 1996.

How does a SEP IRA work?

            Designed primarily for self-employed individuals, SEP IRAs allow employers to make contributions to employees’ retirement savings (including their own).

             Unlike other group retirement plans, only employers are able to fund SEP IRAs.  Employees cannot defer wages into the plan as contributions.  The SEP IRA also has significantly higher contribution limits for employers as they can contribute up to 25% of an employee’s compensation or $70,000 (2025 number which changes year to year), whichever is less.

Are SEP IRA contributions tax deductible?

              One of the great benefits of a SEP IRA is that employers can make contributions on a pre-tax basis.  What does this mean?  It means that when you contribute to your employees SEP IRA on a pre-tax or traditional basis, you do not have to pay state or federal income taxes.  This makes your contribution tax deductible as it reduces your tax liability for the current year.  The funds grow on a tax deferred basis, which means that your employee will have to pay income tax when the funds are withdrawn in retirement after they turn 59 and ½ years old.

Can a SEP IRA be Roth?

              The possibility of starting a Roth SEP IRA was introduced as part of the SECURE Act 2.0. Until the IRS publishes more guidance on this specific type of retirement account, this type of SEP IRA will remain relatively under-utilized. 

               A Roth contribution is not tax deductible for your current year.  The benefit of a Roth account is that after you pay federal and state income taxes, withdrawals from this account can be tax free if you are over 59 and ½, retired, and had the account at least 5 years.

Can a SEP IRA be converted to Roth?

           Yes, you are able to convert a pre-tax SEP IRA into a Roth IRA but there are a number of considerations that you should engage with prior to making your decision.  The SEP IRA is made with pre-tax dollars, and therefore are added to your taxable income for the year when you make the conversion.  This means the entire SEP IRA dollar amount would be distributed from the SEP IRA (causing the taxation) and then contributed to the Roth IRA for future tax-free growth.  Once the conversion is complete, qualified withdrawals from the Roth IRA can occur after age 59 ½ and completing the 5-year rule.

When is the SEP IRA Contribution Deadline?

              Contributions to a SEP IRA must be completed prior to the employer’s tax filing deadline.  This deadline occurs for most small businesses on April 15th each year but can be extended to October 15th.  If you have any specific questions about the flexibility of contributing to a SEP IRA you should consult a tax professional to avoid missing deadlines.

Who gets my SEP IRA Account if i die? 

                This is a hard question as it can be difficult to think about your own mortality.  However, it is an important topic that is often overlooked.  You can add a primary and contingent beneficiary onto your SEP IRA to reduce any unintended consequences.  When you invest in a beneficiary-named financial account, such as a SEP IRA, you should name the individuals or institutions you want to receive the assets in the account when you die.

               These are designated as your primary beneficiaries. A contingent beneficiary is someone or something that receives the benefits of an account if the primary beneficiary can't or won't do so after the account owner's death. Contingent beneficiaries stand in the wings, next in line to inherit assets if something should go wrong. Think of them as a backup plan.

Things to know when designating your SEP IRA Beneficiary:

• Don’t leave the beneficiary form blank! Failing to name a beneficiary is a big mistake because doing so could deprive your heirs or loved ones of inheriting your retirement assets. Another downside is that your retirement assets would go through probate, which is basically the legal process of proving a will, a lengthy, and possibly costly, process which will delay your assets being distributed.
• Don’t designate your estate as the beneficiary. Although it can be, your estate should never be the named beneficiary of a SEP IRA. To do that, either on purpose or simply by failing to name a beneficiary, means the SEP IRA money will be disposed of by probate court, which may also delay the distribution for your heirs for months or even years.
• Beneficiary designations take precedence over wills. Retirement assets are distributed according to the named beneficiary, regardless of other agreements such as wills. So don’t assume if you have a will, that your wishes will be carried out if they don’t jive with the beneficiary form on your SEP IRA accounts.
• Keep your beneficiary designations current. Many people fail to update their beneficiary designations after major life events, such as: marriage, divorce, new additions to the family, relationship changes, death to a named beneficiary

Lastly, consult an expert if you aren’t sure who to name as your beneficiary. Experts would include an estate attorney or a tax professional.

Where can I set up a SEP IRA?

          You can set up a SEP IRA with Retirement Wealth Partners.  We have decades of experience establishing and managing SEP IRAs for various employers.  It’s important to find a competent partner when offering this benefit to your team as mistakes are not only costly, but affects those that impact your business.