when a business is a sole proprietorship the employee owner pays themselves wages and may also make a sep contribution which is limited to 25 of wages or profits minus the sep contribution 7 for a particular contribution rate cr the reduced rate is cr 1 cr for a 25 contribution rate this yields a 20 reduced rate 11
because the funding vehicle for a sep plan is a traditional ira sep contributions once deposited become traditional ira assets and are subject to many of the traditional ira rules including the following in addition to the documents required for establishing a sep plan discussed later each sep ira must meet the documentation requirements for a traditional ira 7sep ira rulessep iras were primarily designed to encourage retirement benefits among businesses that would otherwise not set up employer sponsored plans any small business can establish them including sole proprietors partnerships and corporations including s corporations 87as for participants too high an income can be a limitation the 2024 eligible compensation limit is 345 000 6 however unlike qualified retirement plans the sep does not allow participants including the business owner to borrow up to the lesser of 50 or 50 000 of their vested balance 12specific employees may be excluded by their employer from participating in a sep ira even if they would otherwise be eligible based on the plan s rules for example workers covered in a union collective bargaining agreement for retirement benefits can be excluded employees who are nonresidents can also be excluded as long as they do not receive u s wages or other service compensation from the employer 13sep contributions and earnings are held in sep iras and can be withdrawn at any time subject to the general limitations imposed on traditional iras a withdrawal is taxable in the year received if a participant makes a withdrawal before age 59 generally a 10 additional tax applies 10sep contributions and earnings may be rolled over to other iras and retirement plans tax free 141 additionally sep contributions and earnings must eventually be distributed following the ira required minimum distribution rules 15sep ira vs solo 401 k a sep ira and a solo 401 k also known as an individual 401 k are both retirement accounts that allow employer contributions however they have two main differences the first is that although both accounts have the same maximum contribution limit 69 000 in 2024 you can contribute the maximum to a solo 401 k at a lower income level than a sep ira in 2024 individuals making 154 000 or more could reach the maximum for a solo 401 k sep ira owners however needed to make 276 000 or more to get the same amount second you can take a loan against the solo 401 k which is not allowed with a sep ira 12if you are a small business owner with employees and a sep ira plan you must contribute as much to their plans as yours 1a sep ira however is somewhat easier to set up and maintain a solo 401 k requires its owner to be more involved in its administrative responsibilities and it can also generate higher fees than a sep ira sep ira vs traditional ira vs roth irathere are important differences between these three retirement accounts with a traditional ira you contribute tax free money reducing your tax bill in the year you make the contribution however when you withdraw funds in retirement they are taxed as ordinary income and you are required to make distributions once you reach the age of 73 up from 72 and 70 in previous years 1617 this makes it best for people who expect to be in a lower tax bracket when they retire a roth ira reverses the process you have already paid income tax on the money you contribute so withdrawals in retirement are tax free 16 this makes a roth ira better for people who expect to be in a higher tax bracket in retirement in addition there are no required minimum distributions from a roth ira so if you don t need the money you can just let it sit there and pass the account on to your heirs a sep ira is available to any employer including self employed persons it allows employer contributions which traditional and roth iras do not and all contributions to it are tax free meaning that distributions in retirement will be taxed as ordinary income the maximum contribution limit for a sep ira is considerably higher than that for either a traditional or roth ira employers can get a tax deduction for their contribution which means that when the self employed person is both employer and employee they can get that tax deduction sep iras were invented as a way to help small businesses provide employer sponsored retirement plans to their employees and owners frequently asked questions faqs 