If I Start a Limited Liability Company (LLC), Can I Open a SEP IRA?

You can, if you follow these rules

A limited liability company (LLC) is indeed eligible to establish a Simplified Employee Pension (SEP) IRA, which was designed to make it easy for small-business owners, self-employed individuals, and freelancers to set up tax-advantaged retirement plans.

But if you elect to hang your own small business shingle, be mindful of the fact the rules vary depending on whether or not you are a sole proprietor, whether or not you have rank-and-file employees, or whether or not your business is a corporation.

Key Takeaways

  • An LLC is eligible to set up a SEP IRA for retirement savings.
  • As of 2021, SEP contributions cannot exceed $58,000 per year.
  • 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 2021, the annual contribution made under either of these scenarios cannot exceed $58,000 (up from $57,000 in 2020). 

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

Credit for SEP IRA Plans

Under the new legislation, credit for start-up costs associated with creating eligible employer plans, including SEP IRAs, have recently spiked to the greater of the following two values:  

  1. $500
  2. The lesser $250 multiplied by the number of staffers, or $5,000

An additional $500 in credit applies to eligible employer plans that offer automatic enrollment features. Both credits may be applied for up to three years after the launch of a small business.

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. 

Deadline to Establish a SEP IRA

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

To learn more about setting up a 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.

For 2021, the maximum contribution can be $58,000 or 25% of total compensation (if you are the only employee) up to $290,000, 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.

Article Sources

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  2. Internal Revenue Service. "SEP Contribution Limits (including grandfathered SARSEPs)." Accessed Dec. 30, 2020.

  3. Internal Revenue Service. "Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Pages 6-7. Accessed Dec. 30, 2020.

  4. Internal Revenue Service. "2021 Limitations Adjusted as Provided in Section 415(d), etc." Accessed Dec. 30, 2020.

  5. 116th Congress, 2nd Session. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019." Accessed Dec. 30, 2020.

  6. Beacon Capital Management Investors. "SEP IRA." Accessed Dec. 30, 2020.

  7. Internal Revenue Service. "General Instructions for Forms W-2 and W-3 (2020)," Page 30. Accessed Dec. 30, 2020.

  8. Internal Revenue Service. "SEP Plan FAQs - Contributions." Accessed Dec. 30, 2020.

  9. Internal Revenue Service. "Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Page 7. Accessed Dec. 30, 2020.

  10. STA Wealth Management. Scott Bishop. Accessed Feb. 9, 2021.

  11. Internal Revenue Service. "Operating a SEP." Accessed Feb. 9, 2021.