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Simplified Employee Pension Plan SEP IRA


Employers can make retirement an exciting time for themselves and their employees by setting money aside through a Simplified Employee Pension Plan. This plan differs from the traditional retirement plan that comes from regularly deducting from the employee’s salary, but they have similar rules in some areas.

As a self-employed person who owns a small business, you can set up your SEP IRA before retirement. It is generally a savings scheme for retirement and does not cost much funds to establish.


More so, it allows you to contribute as you wish, more than the usual pension plan allows.

What is a Simplified Employee Pension?


 A Simplified Employee Pension (SEP) is an Individual Retirement Account (IRA) established by a self-employed individual or an employer. It is not limited to only self-employed and employers; freelancers in the United States can establish SEP IRA and contribute to it for their retirement funds.

The account and its investment are tax-advantaged until the retirement due date, and the distributions will be seen as income and taxed. Meanwhile, the contributions made in the account during working years are tax-deductible.

What’s the difference between a SEP IRA and a traditional IRA?

  •  A SEP IRA is an account an employer opens to contribute for both himself and his employees. It offers a higher contribution limit than the traditional Individual Retirement Account IRA.
  • SEP IRA makes saving for retirement easier because establishing it does not cause much stress and is more simplified than the traditional Individual Retirement Account.
  • The traditional IRA is tax-advantaged while it is growing. It comes with a yearly limit to the amount an owner can contribute. Tax will be deducted from the contribution when the owner has retired and received the money.
  • Account owners who try to withdraw from their traditional IRA accounts before the age of 59 and a half will attract an additional tax of 10%.
  • Those with a 401(k) account are also eligible to open this account. More so, owners can convert their investments in the Traditional IRA into assets like stocks, ETFs, or bonds, but this option may not be available when it comes from an employer.

What are the rules for the SEP?

Rules state that anytime an employer is ready to establish a Simplified Employee Pension account, they must first select their preferred bank or financial institution that will the accounts, then have a written agreement that will give all the qualified employees access to the benefits from their accounts.

In an organization with SEP contributions, each eligible employee must have an SEP account opened for them, and the contribution must come from the employer. Some financial institutions require that eligible employees rename their traditional IRA to a SEP IRA before their employer can deposit their SEP IRA contributions.


Contrastingly, some SEP IRA contributions go directly to the employees’ traditional IRA without any changes, making the rules that apply to traditional IRA apply to SEP.

Employees and their employers must adhere to the limitation rule of the account, which comes out each year; employees with very high incomes can cause a limitation on the account. Simplified Employee Pension earnings placed in the original SEP IRA account can be withdrawn anytime.


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