In a word, yes. A limited liability company (LLC) is eligible to establish a Simplified Employee Pension (SEP) IRA.

SEP IRAs were designed to make it easy for small-business owners, self-employed individuals, and freelancers to set up a tax-advantaged retirement plan. If you decide to establish one, be aware of the following rules which vary depending on whether you are a sole proprietor or have employees, or if your business is a corporation.

Key Takeaways

  • An LLC is eligible to set up a SEP IRA.
  • As of 2019, contributions cannot exceed $56,000.
  • Rules regarding contributions can vary depending on whether the LLC is for a sole proprietor, a corporation, or has employees.

SEP IRA Contribution Limits

The IRS allows employers to contribute as much as 25% of an employee's gross annual compensation. For LLCs set up as unincorporated businesses, such as sole proprietorships, partnerships, and limited liability partnerships (LLPs), plan contributions may be up to 20% of the business owner's modified net profit. In 2019, the contribution made under either of these scenarios cannot exceed $56,000.

Should you decide to hire employees, they must also be covered under the plan if they meet the eligibility requirements.

Only employers, including the self-employed, can make contributions to a SEP IRA.

Contribution Rules for Corporations

Keep in mind that employer-sponsored retirement plan contributions (including SEPs) are usually based on W-2 wages if the business is a corporation. This means that you may need to pay yourself W-2 wages in order to be eligible to receive a SEP contribution from the business. Check with your tax professional to be sure.

Deadline to Establish a SEP IRA

The deadlines for establishing a SEP IRA and for making contributions are the the same. It is the filing deadline for the employer's tax return, including extensions.

To learn more about setting up an SEP IRA, read IRS Publication 560.

Advisor Insight

Scott Bishop, CPA, PFS, CFP®
STA Wealth Management, LLC, Houston, TX

If you have your own company, whether you are an LLC or even a sole proprietor (in which you report your income on Schedule C of your personal 1040 tax return), you can open and fund a SEP IRA. It’s an employer plan that you will fund with company money, in contrast to a 401(k) or Traditional IRA/Roth IRA that you fund personally.

You are able to fund up to 20% of your company earnings. So if your company makes $200,000, you can defer $40,000 into the plan.

In 2019, the maximum contribution can be $56,000 or 25% of total compensation (if you are the only employee) up to $280,000, whichever is less. For high-income sole-member LLCs, a SEP IRA is a great way to go. If you are making less, other options may be better, like a Solo 401(k) or a SIMPLE IRA.