how a simplified employee pension sep works
a sep ira is an attractive option for many business owners because it does not come with many of the start up and operating costs of most conventional employer sponsored retirement plans many employers also set up a sep ira to contribute to their own retirement at higher levels than a traditional ira allows small organizations favor sep iras because of eligibility requirements for contributors including a minimum age of 21 at least three years of employment and a 750 compensation minimum for 2024 in addition a sep ira allows employers to skip contributions during years when business is down 61sep iras are treated like traditional iras for tax purposes and allow the same investment options the same transfer and rollover rules that apply to traditional iras also apply to sep iras when an employer makes a contribution to a sep ira account it receives a tax deduction for the amount contributed additionally the business is not locked into an annual contribution requirement decisions about whether to contribute and how much can change each year 71 there is however an upper limit which is 69 000 in 2024 6the employer is not responsible for making investment decisions instead the ira trustee determines eligible investments and the individual employee account owners make specific investment decisions 1 the trustee also deposits contributions sends annual statements and files all required documents with the irs 8contributions to sep iras are immediately 100 vested and the ira owner directs the investments an eligible employee including the business owner who participates in their employer s sep plan must establish a traditional ira to which the employer will deposit sep contributions 9some financial institutions require the traditional ira to be labeled as a sep ira before they will allow the account to receive sep contributions others might allow sep contributions to be deposited to a traditional ira regardless of whether the ira is labeled as a sep ira contributions to a sep ira are immediately 100 vested and account owners must choose their investments themselves from a list provided by the account trustee sep ira contribution limitscontributions made by employers cannot exceed the lesser of 25 of an employee s compensation or 69 000 in 2024 67 as with a traditional ira withdrawals from sep iras in retirement are taxed as ordinary income 10