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What Every Business Owner Should Know about SEP Employer IRA Accounts

What Every Business Owner Should Know about SEP Employer IRA AccountsPhoto from Unsplash

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As a business owner, it is vital to understand the various retirement savings options available to you and your employees. One such option that can provide significant benefits for both parties is the SEP (Simplified Employee Pension) Employer IRA account. In this article, we will dig into what you should know about SEP Employer IRA accounts – from how they work and who is eligible to contribute, to the tax advantages they offer and how they can help you attract and retain top talent in your organization.

By the end of this article, you will have a thorough understanding of why SEP Employer IRA accounts are a valuable asset for any business owner looking to secure their financial future and that of their employees.

How SEP Employer IRA Accounts Work

  • Contributions: Employers can make contributions to their employees’ SEP IRA accounts, up to a certain percentage of each employee’s compensation. This allows for tax-deductible contributions that can help both the employer and employee save for retirement.
  • Tax Benefits: Both employer contributions and any investment earnings in the SEP IRA account grow tax-deferred until withdrawal during retirement. This means that the money can compound and grow faster over time by deferring taxes until future withdrawals post-retirement.
  • Retirement Distributions: When employees reach retirement age, they can begin taking distributions from their SEP IRA account. These distributions are then taxed as ordinary income, allowing for a steady stream of income during retirement while also providing flexibility in managing withdrawals.

Eligibility and Contribution Limits

  • Eligibility: Any business owner, regardless of the size of their company, can establish a SEP IRA for themselves and their employees. This makes it a valuable retirement savings option for small businesses.
  • Contribution Limits: As of 2021, the maximum contribution limit for a SEP IRA is $58,000 or 25% of an employee’s compensation, whichever is lower. For self-employed individuals, the calculation to determine their maximum contribution limit can be more complex.
  • Age Restrictions: There are no age restrictions for contributing to a SEP IRA. Employers can continue making contributions even if they are over the age of 70½, unlike with traditional IRAs.

Tax Benefits of SEP Employer IRA Accounts

  • Tax-deferred contributions: One major tax benefit of a SEP Employer IRA account is that employer contributions are tax-deductible, reducing taxable income for the business. This can result in lower overall tax liability for the company.
  • Tax-deferred growth: Another advantage is that investments held within a SEP Employer IRA account grow on a tax-deferred basis. This means that any dividends, interest, or capital gains earned on investments will not be taxed until funds are withdrawn from the account.
  • No taxes on withdrawals: While contributions and investment earnings grow tax-free within the account, withdrawals made during retirement will be subject to ordinary income taxes. However, by then retirees may find themselves in a lower tax bracket than during their working years, potentially reducing their overall tax burden.

Schedule a Consultation with Fortitude Financial to Learn More

For 29 years, Fortitude Financial Group has been providing exceptional service to its longtime clients. Our knowledgeable team of financial advisors are honored to find the best financial solutions for your family, business, investment and life insurance needs. To learn more about how we can help your business get set up with SEP Employer IRA Accounts, contact us today! We would love to answer any questions you may have.

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