SEP IRA

What does SEP IRA stand for?

               SEP IRA stands for Simplified Employee Pension Individual Retirement Account. The SEP IRA was established by Congress as part of the Revenue Act of 1978 to provide employers, particularly small businesses, with a simplified way to contribute toward employees' retirement savings. Subsequent legislation, including the Small Business Job Protection Act of 1996, expanded and modified SEP IRA rules to make these plans more accessible and easier to administer.

How does a SEP IRA work?

             Designed primarily for self-employed individuals and small businesses, SEP IRAs allow employers to make retirement contributions for eligible employees, including themselves if they are self-employed.

              Unlike many other employer-sponsored retirement plans, SEP IRAs are funded exclusively through employer contributions. Employees generally cannot make elective salary-deferral contributions to a SEP IRA. SEP IRAs also offer relatively high contribution limits. For 2025, employer contributions are generally limited to the lesser of 25% of an employee's compensation or $70,000. Contribution limits are subject to annual IRS adjustments.

Are SEP IRA contributions tax deductible?

               One of the key benefits of a SEP IRA is that employer contributions are generally tax deductible, which may reduce the employer's current-year taxable income. Contributions made to a SEP IRA are not currently taxable to the employee. Assets in the account grow on a tax-deferred basis, meaning taxes are generally not due on earnings as they accumulate. When funds are withdrawn from a SEP IRA, distributions are generally subject to ordinary income tax. In addition, withdrawals taken before age 59½ may be subject to a 10% federal tax penalty unless an exception applies.

Can a SEP IRA be Roth?

               The SECURE 2.0 Act introduced the ability for certain SEP IRA employer contributions to be designated as Roth contributions. The availability of Roth SEP IRA features may vary depending on the custodian, plan structure, and applicable administrative requirements.

                Roth contributions are made with after-tax dollars and generally do not provide a current-year tax deduction. The potential benefit of a Roth account is that qualified distributions, including earnings, may be received income tax-free if certain requirements are satisfied, generally including attainment of age 59½ and completion of the applicable five-year holding period.

Can a SEP IRA be converted to Roth?

           Yes, a SEP IRA may generally be converted to a Roth IRA. However, there are several important tax and financial considerations to evaluate before making this decision. Because SEP IRA contributions are generally made on a pre-tax basis, the taxable portion of the amount converted is generally included in your taxable income for the year of the conversion.

A Roth conversion involves moving assets from a SEP IRA to a Roth IRA. Depending on your circumstances, all or a portion of the SEP IRA may be converted. While the conversion itself is not generally subject to the 10% early withdrawal penalty, the taxable amount converted is generally included in income for the year of the conversion.

Once the conversion is complete, assets in the Roth IRA may continue to accumulate on a tax-advantaged basis. Qualified distributions from a Roth IRA, including earnings, may be received income tax-free if certain requirements are met, generally including attainment of age 59½ and satisfaction of the applicable five-year holding period.

When is the SEP IRA Contribution Deadline?

               Contributions to a SEP IRA generally must be made by the employer's tax filing deadline, including any applicable extensions. For many small businesses, this deadline is April 15; however, employers that obtain a filing extension may have until October 15 to make contributions. Because contribution deadlines can vary based on business structure and tax filing status, employers should consult with their tax professional regarding applicable deadlines and contribution requirements.

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.