How to Get Started With SEP IRA?


Being self-employed comes with its own set of benefits. You get the freedom and flexibility to work according to your convenience and be financially stable.

If you are an independent business, having a SEP IRA Simplified Employee Pension plan is beneficial to successfully retiring like your traditional worker counterparts.

In fact, according to the experts at SoFi, “you could potentially save even more for retirement than you could with a 401(k)”. Hence, the following explanation can help you with understanding SEP IRA (Simplified Employee Pension) plans before you invest for greater confidence.

What is a SEP IRA?

A SEP (Simplified Employee Pension) IRA is basically an individual retirement account for business owners and the self-employed that enables them to stockpile tax-deferred contributions toward their retirement like traditional retirement accounts.

SEP IRA Eligibility

To qualify for a SEP IRA, you must be a self-employed individual or a small business owner with no more than a few employees.

You must also make equal contributions as a percentage of compensation on behalf of any worker at least 21 years old and has been employed by you for the last three years and has earned at least $600 from you in the previous year.

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To contribute at least 15% of your compensation for yourself, you must also invest 15% of that employee’s compensation to their plan. However, the employee owns and manages their account.

SEP IRA Contribution Limits

SEP IRAs are unique in that they enable you to contribute a significant amount to your yearly plan compared to a traditional IRA. However, there is no catch-up contribution at 50+.

SEP annual contribution limits for 2021 are set at $58,000 or 25% compensation, whichever is lesser. However, if you are self-employed, your deduction is 25% of your net income.

There is also a 25% compensation calculation limit for each eligible employee.

How Does a SEP IRA work? The Pros and Cons


  • A SEP IRA is easy to set up and manage.
  • SEP IRAs can also be combined with a Roth IRA or a traditional IRA.
  • SEP account holders are also not required to make contributions each year.


  • You can’t opt to pay taxes on contributions now and then take distributions tax-free in retirement like a Roth IRA.
  • Distributions taken before 59 1/2 are subject to a 10% penalty, and they are also taxed as income unless you qualify for an early withdrawal exception.
  • Minimum distributions are required at age 72.

How do I open a SEP IRA?

You can open a SEP IRA account online via your chosen account provider, who will then help you set up your account according to IRS guidelines.

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How do I Invest my SEP IRA?

Once your account is open, you can choose from the investments your account provider offers, which often include mutual funds, stocks, and bonds.

In the end, if you work on your own, financial independence in retirement is still possible with a self-employed retirement plan, such as a SEP IRA, and if you start saving today.

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About the Author: John Watson