SEPs Are IRA-Based Retirement Plans That Aren’t IRAs: What You Need to Know
When you hear the term “SEP IRA,” it sounds like just another version of a traditional IRA. But that’s a mistake — and one that can lead to tax errors, missed opportunities, or even penalties if you’re a business owner or self-employed.
A Simplified Employee Pension (SEP) plan uses a traditional Individual Retirement Account (IRA) as its funding vehicle, but it is not a personal retirement account. A SEP is a type of employer-sponsored plan with its own set of rules, contribution limits, and responsibilities — distinct from IRAs.
Understanding that difference is critical for anyone who runs a business, works as a freelancer, or wants to maximize their retirement contributions.
📘 What’s a SEP Plan?
A SEP plan is a retirement plan that allows employers — including sole proprietors — to make tax-deductible contributions to retirement accounts for themselves and their eligible employees.
SEP contributions are deposited into a special type of account called a SEP IRA, but don’t let the name confuse you: SEP IRAs follow the rules of the plan, not the individual.
🧠 SEP IRAs vs. Traditional IRAs: Not the Same
| Feature | Traditional IRA | SEP IRA |
|---|---|---|
| Who contributes? | Individual | Employer only |
| Max contribution (2025) | $7,000 ($8,000 if 50+) | $69,000 or 25% of compensation |
| Catch-up contributions? | Yes | No |
| Set up by? | Individual | Employer |
| Plan rules? | IRA rules only | Employer must follow SEP plan rules |
| Employee control? | Full control | Limited; employer controls contributions |
Though the SEP IRA is technically an IRA, it’s not used the same way. With a traditional IRA, you decide when, how much, and whether to contribute. With a SEP IRA, only the employer contributes, and the employee can’t make their own deposits into the plan.
🔎 Why SEPs Use IRAs — But Aren’t IRAs
A SEP plan is governed by IRS-qualified retirement plan rules — not just individual retirement rules. The IRA is simply a custodial account used to hold the funds.
Employers choose how much to contribute (within IRS limits), and must contribute the same percentage of salary for all eligible employees — including themselves.
✔️ Examples:
- If the employer contributes 10% of their own salary to their SEP, they must contribute 10% of every eligible employee’s salary.
- If you’re self-employed, your maximum contribution is roughly 20% of your net earnings (after subtracting self-employment taxes).
👤 Who Can Use a SEP Plan?
SEP plans are ideal for:
- Self-employed individuals
- Solo business owners
- Small business owners who want an easy retirement option
📌 Employee Eligibility Rules:
To be included in a SEP plan, an employee must:
- Be at least 21 years old
- Have worked for the business in 3 of the last 5 years
- Earn at least $750 in compensation (2025 threshold)
Once eligible, the employer must contribute on their behalf if any contributions are made that year.
📈 SEP Plan Contributions: Key Rules
- Only the employer contributes.
- Contributions must be:
- Based on compensation
- Equal in percentage for all eligible employees
- Made by the business tax filing deadline (including extensions)
There’s no Roth option and no catch-up for those over 50.
✅ Benefits of SEP Plans
- High contribution limits — ideal for maximizing tax-deferred savings.
- Flexible contributions — skip a year without penalty.
- Simple setup — use IRS Form 5305-SEP and avoid costly plan filings.
- Tax deductible — employer contributions reduce business income.
⚠️ Drawbacks to Watch For
- No employee deferrals — only employer money goes in.
- Equal treatment rule — can get expensive if you have employees.
- No Roth or after-tax contributions allowed.
- Employees can withdraw funds — it’s their IRA, even though you contributed.
💡 Real-World Scenario
Case 1: Solo Consultant in Georgia
Lisa, a self-employed consultant in Brookhaven, earns $100,000/year. Through a SEP plan, she can contribute nearly $20,000 to a SEP IRA — much more than the $7,000 limit of a traditional IRA.
Case 2: Small Business with 3 Employees
John owns a landscaping business. If he contributes 15% of his $80,000 salary to his SEP ($12,000), he must also contribute 15% of each employee’s salary — say, $4,500 for one and $3,000 for another. SEP plans become costlier with each new hire.
📌 Key Takeaways
- A SEP plan is an employer plan that uses IRAs, but follows retirement plan rules — not IRA rules.
- SEP IRAs should not be treated like personal IRAs.
- SEP plans offer flexibility, high contribution limits, and ease — but also come with employer responsibilities.
- They are best suited for solo business owners or businesses with no or few employees.
📋 What to Do Next
- If you’re self-employed, calculate your max SEP contribution and consider setting one up through your bank or brokerage.
- If you have employees, talk with a financial advisor about whether a SEP, SIMPLE IRA, or 401(k) fits your business.
- Don’t treat a SEP like a traditional IRA — know the rules before you contribute.
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