A SEP-IRA (Simplified Employee Pension Individual Retirement Account) is an employer-funded retirement plan that is easy to establish and maintain, designed for self-employed individuals and small business owners.
Contribution limits (2025): - 25% of compensation up to $70,000 per year. - For self-employed: 20% of net self-employment income (after SE tax deduction), up to $70,000. - No catch-up contributions.
Key features: - Employer contributions only — employees cannot make elective deferrals (unlike a 401(k)). - Same percentage for all: Employers must contribute the same percentage of compensation for all eligible employees as they contribute for themselves. - 100% immediate vesting — all contributions vest immediately. - No loans permitted.
Eligibility for employees: Must include employees who are at least 21 years old, worked for the employer in at least 3 of the past 5 years, and received at least $750 in compensation.
Tax treatment: Contributions are tax-deductible; growth is tax-deferred; withdrawals taxed as ordinary income + 10% penalty if before 59½.
RMDs: Same as traditional IRA — begin at age 73.
Simple to administer: No annual 5500 filing required for most SEPs; individual IRA accounts for each participant.
> Exam tip: The SEP's $70,000 limit is much higher than the IRA's $7,000 limit. Self-employed individuals calculate contributions on net SE income using an effective rate of ~20% (not 25%). All employees must receive the same percentage — not the same dollar amount.