2020 SEP IRA Guide for Business Owners & Freelancers

For many reasons, the SEP IRA is an extremely attractive option for a retirement account. First, a SEP IRA retirement account is easy and inexpensive for a business owner to set up and to administer. Second, both individuals with self-employment income and businesses, including partnerships and S corporations, can set up a SEP IRA. Third, the amounts added to the SEP IRA retirement plans are flexible and at the discretion of the owner. Fourth, high contribution amounts are possible with SEP IRA. The maximum that can be added to a SEP IRA, calculated as a percentage of taxable income, may be as high as $49,000 per year. With features such as these, it will be wise to look at the SEP IRA retirement account option more closely.

Looking to setup a SEP IRA account? If so, then see how the Simplified Employer Pension retirement account can help you plan a fun and fruitful retirement in the future.

SEP IRA Overview

  • Easy To Set Up: Inexpensive for a business owner to set up and to administer
  • Who is Suited for SEP IRA?: Employers who wish to make large tax deductible retirement plan
  • SEP IRA Contribution Limits: Up to $57,000 for 2020
  • Employee Eligibility Conditions: a.)at least 21 years of age ; b.)has worked for the employer for at least three of the previous five years; c.) received at least $500 in compensation for the tax year

What is a SEP IRA?

SEP IRA stands for Simplified Employer Pension – Individual Retirement Account.

SEP IRA retirement plans give small businesses and those who are self-employed a way to build up a retirement account for themselves and for their employees.

Business owners who provide another type of retirement account can set up a SEP IRA plan as well. In fact, individuals who have self-employment income can set up an SEP IRA, even when they are employed and have a retirement plan with their employer.

In many ways, the SEP IRA is similar to a traditional IRA. Contributions can be made to the SEP IRA each year. Within the IRS limits, money set aside in a SEP IRA is a pre-tax contribution and therefore will reduce taxable income in the tax year they are made.

In addition, any interest or earnings growth is tax-deferred; taxes are not owed on money in the SEP IRA until it is withdrawn.


The first step to setting up a SEP IRA is to choose a financial institution to be the trustee of retirement contributions. Next, the business owner must complete IRS Form 5305-SEP or an IRS approved prototype SEP provided by the financial institution setting up the retirement account.

In some cases, there will be expenses and other startup costs such as fees charged by the financial institution, lawyers, or consultants. Some business may qualify for a $500 tax credit each of the first 3 years for any SEP IRA startup costs.

An account must then be opened for each eligible employee. Depending on the details of the plan and the financial institution administering the SEP IRA, the employees may have a voice in the type of retirement account set up for them. Employers must provide each eligible employee with the SEP IRA documentation and basic information about the retirement account.

Eligible employees are those who are at least 21 years old, received $550 in 2010 or 2011 compensation, and have worked any amount for the employer in three of the last five years. This includes part-time, temporary employees, and those who did not finish the year working for the employer. Employers may choose to contribute to employees who are not yet eligible.

SEP IRAs are funded by deposits into the retirement accounts. Every year that employers contribute to the SEP IRA, they must contribute the same percentage of wage compensation to the retirement accounts of all eligible employees and to their own account if they pay themselves wages.

Employers must also notify employees of contributions made to the SEP IRA by January 31st of the following year.

SEP IRA contributions are immediately 100% vested. All contributions must be in cash, never in property. In addition, SEP IRA contributions cannot be a salary reduction and employees cannot contribute to the SEP IRA set up by their employer.

Except for a Roth IRA which is funded with after-tax contributions, most retirements plans can be rolled over into a SEP IRA account. Plans that allow a SEP IRA rollover include a 401k, a traditional IRA, profit sharing plans, and rollover IRAs.

Neither the employer nor the employee is required to file any SEP IRA forms with the government. The SEP IRA trustee or financial institution provides annual statements concerning contributions and account value to the IRS and to each participating employee.

Additionally, a loan cannot be taken out against a SEP IRA account. Further SEP IRA rules related to deadlines, contribution limits, and withdrawals are described below.

SEP IRA Deadline

A SEP IRA can be for established and funded for the previous year until the tax filing deadline, which is April 15 for sole proprietors or October 15 if an extension was filed. The deadline for corporations to file taxes, and therefore to establish or fund a SEP IRA is generally March 15 or September 15 if an extension was filed.

SEP IRA Contribution Limits

Contribution limits for those compensated with wages:

Each year, employers can contribute up to 25% of each employee’s total compensation into each employee’s SEP IRA account. The upper limit of contributions that can be made to a SEP IRA per year for 2020 is $57,000, which is 25% of $245,000, the maximum portion of compensation that can be considered for contributions. These SEP IRA limits also apply to employers and owners that are paid wages as W-2 income.

Furthermore, an annual addition limit applies if an employer contributes to other employee retirement plans, such as a 401(k). For the tax years 2010 and 2011, this annual limit is either $49,000 or 100% of an employee’s total compensation, whichever is less. All defined contribution plans an employer has for its employees must be included in order to determine if the annual addition limit has been reached.

Contribution limits for those compensated with business profits:

For business owners taxed as a sole proprietorship, annual SEP IRA contributions are limited to 20% of the net adjusted business profits or of the net adjusted self-employment income. Net adjusted self employment income is determined by subtracting ½ of the self employment tax from net self-employment income, making the effective maximum about 18.5% of net earnings. This limit also applies to LLCs and unincorporated partnerships choosing to be taxed like sole proprietors.

Both the $49,000 SEP IRA maximum and the annual addition limits apply to owners compensated with business profits as well. A warning: employers, along with all affected employees, exceeding these contribution limits will be subject to excise tax penalties and then other potentially adverse tax consequences if the overpayments are not corrected.

SEP IRA Calculator

Example 1. For an employee with a total wage compensation of $60,000 in 2010, an employer could decide to contribute 15% of the employee compensation, making the 2010 tax-year contribution $9,000. This amount, by itself, is less than both the $49,000 upper limit and the 25% SEP IRA maximum of $15,000.

Example 2. For a self-employment net income of $50,000 in 2010, ½ of the self-employment tax is $3532.39 making the net adjusted self-employment income $46,467.61. 20% of this amount is $9,293.52, which would be the maximum 2010 tax year contribution that could be made to the owner’s SEP IRA.

SEP IRA Withdrawal

Withdrawals from a SEP IRA are treated as ordinary income for tax purposes. A SEP IRA withdrawal can be made without penalty after the age of 59 and ½. With some exceptions, withdrawals made prior age 59 and ½ incur a penalty of 10% in addition to any tax liability. Minimum withdrawals or distributions from the SEP IRA are mandatory after the age of 70 and ½.

SEP IRA Brokers

A SEP IRA retirement account can be established, often without cost to the business, with many types of financial institutions including banks, stock brokerage firms, insurance companies, administrators of mutual funds, and others.

The possibilities are many as these institutions can setup a SEP IRA and manage it or allow the retirement account holder to manage some of the holdings and even trade stocks in the account. Five specific financial institutions are listed below along with some of their financial products that allow you to invest in SEP IRA accounts.

Merrill Edge SEP IRA Account – offers stocks, ETFs, annuities, money markets, and CDs. 

TD Ameritrade SEP IRA – offers purchasing of stocks, mutual funds, ETFs, and money market accounts.

Vanguard can keep retirement funds in stocks, a mutual fund, ETFs, an annuity, bonds, or CDs. 

USAA has CDs, money market accounts, mutual fund annuities, and brokerage services. 

Beacon Capital Management Advisors (BCM) offers clients SEP IRAs as well as other retirement plans. The trustee of the retirement accounts of BCM clients is National Financial Services LLC, a Fidelity Investments® company. 

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