SEP IRAs Tutorial
  1. SEP IRAs: Introduction
  2. SEP IRAs: Eligibility Requirements
  3. SEP IRAs: Contributions
  4. SEP IRAs: Distributions
  5. SEP IRAs: Conclusion

SEP IRAs: Introduction

By Denise Appleby

What Is a Simplified Employee Pension (SEP) Plan?
An SEP is a retirement plan established by employers, including self-employed individuals (sole proprietorships or partnerships). The SEP is an IRA-based plan to which employers may make tax-deductible contributions on behalf of eligible employees, including the business owner. The employer is allowed a tax deduction for plan contributions, which are made to each eligible employee's SEP IRA on a discretionary basis. (For background reading, see What is the difference between a Roth, SEP and Traditional IRA?)

Employees do not pay taxes on SEP contributions. However, distribution of these amounts, plus any earnings are taxed An employee (including the business owner) who is eligible to participate in his or her employer's SEP plan must establish a Traditional IRA to which the employer will deposit SEP contributions. Some financial institutions require the Traditional IRA to be labeled as an SEP IRA before they will allow the account to receive SEP contributions. Others will allow SEP contributions to be deposited to a Traditional IRA regardless of whether the IRA is labeled as an SEP IRA. Because the funding vehicle for an 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:

  • Distribution rules
  • Investment rules
  • Contribution and deduction rules for Traditional IRA contributions. These apply to the employee's regular IRA contributions, not the SEP-employer contributions.
  • Documentation requirements for establishing an IRA. In addition to the documents required for establishing an SEP plan (discussed later), each SEP IRA must meet the documentation requirement for a Traditional IRA.
(These rules are explained in the tutorial Traditional IRAs.) SEP IRAs: Eligibility Requirements

  1. SEP IRAs: Introduction
  2. SEP IRAs: Eligibility Requirements
  3. SEP IRAs: Contributions
  4. SEP IRAs: Distributions
  5. SEP IRAs: Conclusion
  1. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  2. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  3. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  4. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  5. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  6. Medigap

    Also called Medicare Supplement Insurance, Medigap is health ...
  1. Can mutual funds only hold stocks?

    There are some types of mutual funds, called stock funds or equity funds, which hold only stocks. However, there are a number ... Read Full Answer >>
  2. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  3. Do mutual funds pay interest?

    Some mutual funds pay interest, though it depends on the types of assets held in the funds' portfolios. Specifically, bond ... Read Full Answer >>
  4. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  5. Do mutual funds pay dividends?

    Depending on the specific assets in its portfolio, a mutual fund may generate income for shareholders in the form of capital ... Read Full Answer >>
  6. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!