facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause Share Arrow Right
Investment Retirement Funding Insights small business retirement plans small business

Who Can Contribute to SEP IRA?

%POST_TITLE% Thumbnail

S&A Financial Services, Inc. Blog

This information can also be found on Small Business Financial Podcast , episode #3.

What is a SEP IRA?  Is a SEP IRA good for me?

They tend to resemble that of a profit sharing plan, but you (the employer) deposit contributions to an IRA instead of a qualified Plan Trust.

These type of retirement plans require very little administration. In fact, there are no annual or administrative reporting requirements.   

Contribution timeline is flexible.   You can contribute up to prior years filing date, which includes extensions.  

  • This is pretty important to those small business owners out there.  Take my situation.  After I submitted all the necessary docs to my CPA planner, he came back and told me I owed quite a bit of money.  He told me I did a terrible job of estimating my quarterly taxes (which I already new that news was coming), but also that I could contribute about $18k more to my SEP - $58k max for 2021.  He knew that I had some money (cash) in my TOD account at Schwab.  So, he advised me to transfer $18k from my TOD to SEP (non taxable event since TOD money was in cash), which is tax-deductible, and that would knock my federal liability down about $3k and my state liability down about $1.5k.  

As a small business owner, it's invaluable to have a competent CPA planner in your corner to discuss tax strategies with you along the way to make sure you're making the most efficient financial decision(s) along the way.  This is just one example of how my CPA planner helps me out. 

SEP IRA contributions - you can vary your contributions year-to-year depending on profitability of your business.  If COVID times hit your small business hard, you didn't have to contribute to your SEP.  It's nice to have that flexibility year-to-year. 

Employees can contribute up to 25% of annual income. If you’re self-employed, you can contribute 20% (after subtracting the self-employment tax deduction of your businesses’ net profit or equivalent to the employee percentage given).  I always tell my small business clients, when trying to figure out how much they can put towards their SEP, we'll start off with the rough number of 20% and if you can get close to that level, then we'll coordinate with your CPA planner to make sure we get the exact dollar amount.  Assuming you're not able to put in the full $58k (2021 IRS limit).

These plans are good for those small bus owners that are sole props or have a partnership – very few or no employees.  Exception being....maybe your spouse or a family member is on payroll and you'd like to (out of goodness of your heart) help excel their retirement savings.  Having a SEP with employees can get expensive.....

Can you use SEP for S corp or C corp?  Yes, but just doesn’t seem as advantageous.   Reason being is that you MUST include all employees who are at least 21yrs old and that have worked under your roof 3 of the last 5 years earning more than $600.   

You can decide what amount to contribute each year, from $0 to the maximum SEP IRS limit - 25% of compensation (20% if you're self-employed)

  •  $58,000 for tax year 2021 or $61,000 for tax year 2022, whichever is less.

Distributions or withdrawals from a SEP are penalty-free after age 59½. If you do not start Required Minimum Distributions (RMDs) by age 72, you will face a 50% penalty on the total amount of the distribution. Withdrawals before age 59½ are subject to a 10% penalty.  There are certain exceptions for which you can withdraw funds before age 59½ without taking a 10% penalty, including a rollover to another IRA, some higher-education expenses, qualified first-time home purchase expenses, death, disability, and certain medical expenses.

Make sure you coordinate with your CPA planner or competent financial advisor prior to making withdrawals from your SEP.

Keep in mind, depending on your employee size, the Simple IRA or Solo 401k may be a better fit.

Bottom line, make sure you're utilizing the knowledge of your CPA planner and /or your competent financial advisor to make sure you have the best retirement plan for your situation.  

Other Resources:

Podcast on Simple IRA's 

S&A Financial Services, Inc. website

YouTube explanation on SEP IRA 

SEP IRA right for your small business?  Jump on MY CALENDAR for quick, 15min phone chat to find out. 


S&A Financial Services, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Blog Content