Decoding the SEP-IRA

By Mack Bekeza, CFP®

With millions of small business owners in the United States, one of the most significant problems they face is how do they plan for retirement for themselves and their families while growing and maintaining their small businesses. On top of that, how can they incentivize their employees to stay with them? Is there a retirement plan that is easy to open and can allow employees to reap rewards of the company’s success? Guess what, there is, the SEP-IRA! But wait, what is a SEP-IRA, and what makes it an excellent tool for small business owners? Don’t worry, MoneyMack has you covered!

What is a SEP IRA

Let’s start by decoding the two acronyms that makeup “SEP-IRA.”







After seeing this broken down, a SEP IRA is a specialized IRA that a small business owner can contribute to for their retirement as well as their employees’ retirement while receiving a handsome tax deduction for doing so. And unlike a Traditional IRA, where you can contribute up to $6,000 (or $7,000 if you are 50 or older) for years 2019 and 2020, an employer can contribute up to $56,000 for 2019 and $57,000 for 2020 (up to 25% compensation, whichever is less). Sounds incredible, right? But wait! There are a few things we need to clear up. 

Can any employer establish and contribute to a SEP-IRA?

Yes! However, the SEP is ideal for the following employers:

  • Sole Proprietors 
  • LLCs, Partnerships, and Corporations who have very few or no employees can also participate.

Why is the SEP-IRA optimal for businesses with few or no employees?

If you do not have any employees, you can contribute up to 25% of your compensation, or up to $56,000 for 2019 and $57,000 for 2020. And other than following the establishment process, which I will explain further below, contributing to a SEP is not super complex at all.

But what if you have an employee or even a few employees?

For an employer to contribute to a SEP for an employee, the employee must be considered an “eligible participant.” What is that, you may ask? An eligible participant meets the following: 

  1. They are 21 or over.
  2. They have worked for you for three of the past five years.
  3. They earned at least $600 in compensation during the year you are planning to make contributions.

The final reason why SEPs are ideal for businesses with few or no employees is that if the business owner decides to contribute 25% of their compensation to their SEP, they must contribute 25% of their employees’ compensation to their SEPs as well. This is a huge win for the employee but can be a significant expense for the employer since 25% of an employee’s compensation can be quite high. However, employers can exclude certain types of employees that would usually be considered eligible (i.e., union members and certain non-resident aliens)

In short, if your employees are not highly-compensated, a SEP-IRA is a compelling option as a retirement plan. If you do have highly compensated employees, you may want to consider establishing another type of retirement plan. Consult your tax professional and Financial Planner if you are considering developing a company retirement plan. 

So with that out of the way, what else should you know about SEP-IRAs?

Is there a “Roth SEP-IRA?”

Unfortunately, there is no such thing as a Roth SEP-IRA of 2020.

How do contribution deadlines work for SEP-IRAs?

Since business owners will typically require some sort of extension when it comes to filing their annual tax returns, the IRS allows contributions to be made before the individual employer’s tax filing date. For instance, if a small business owner filed an extension and had to file 2019 taxes by October 15th, 2020, they would have until October 15th, 2020 to make SEP contributions for 2019. 

Do you need to contribute to SEP-IRA every year?

No! One of the main benefits of a SEP is that you are not obligated to contribute to the SEP or your employees’ SEPs every year if you choose not to. When it comes to contributing, the IRS wanted to make this as fair as possible for the business owner.

Remember this: If you contribute to your SEP, you must contribute to everyone else’s SEPs. If you don’t contribute to your SEP, you don’t have to contribute to your employees’ SEPs either. 

How can someone invest using a SEP-IRA

Just like a Traditional IRA, A SEP-IRA can be invested in the following: 

  • Individual Stocks
  • Individuals Bonds
  • Mutual Funds
  • Exchanged Traded Funds (ETFs)
  • Certificates of Deposits
  • Covered Call Options
  • Real Estate (a minimal amount of qualified custodians allow this)

How do you Establish and Open a SEP IRA?

To establish a SEP IRA, you must do the following:

  1. You must have an Employer Tax ID Number (TIN) or Employer Identification Number (EIN) established with the IRS. Looking at you, Sole Proprietors!
  2. You must have a written agreement for your SEP-IRA. There are two ways you can go about this, you can fill out the IRS form 5305-SEP, this is a self-certification form, and you are not required to file this directly with the IRS. The second way to do this is by opening an account with a Qualified Custodian, and they will draft an account agreement for you
  3. Notify your employees that you have established a SEP-IRA and hand them a copy of either your SEP-IRA agreement from your Custodian or Form 5305-SEP.
  4. Lastly, open the accounts! Your custodian should send out the remaining material information regarding their SEPs.

Where can I open a SEP-IRA

As mentioned, you can open a SEP-IRA with any Qualified Custodian. But what is a Qualified Custodian? Qualified Custodians can include in the following: 

  • Banks (not all banks are Qualified Custodians for IRA assets, call your bank to check beforehand)
  • Credit Unions (not all Credit Unions are Qualified Custodians for IRA assets, call your credit union to check beforehand)
  • Brokerage Firms such as Charles Schwab, Vanguard, Fidelity, TD Ameritrade, etc. 

How do withdrawals work?

Have you read our blog on Traditional IRAs? If not, we talk about the ins and outs of early withdrawals near the bottom of the blog!


So Business Owners, have you considered establishing a retirement plan for your company?


Before you take on any investment or retirement strategy, it is vital that you seek out proper investment and tax advice beforehand. Investment performance is never guaranteed, and investments may lose some or all of their value. On top of that, there may be severe tax consequences if withdrawals are taken improperly and can have a significant impact on your portfolio and retirement. Although we provide Investment Advice and Personal Financial Planning Services, we at MWM do not offer tax advice, and any tax advice should be rendered by a licensed tax professional such as a CPA. 

Certified Financial Planner, CFP, Eligible Employees, Investing, IRA, Mack Bekeza, Mackenzie Bekeza, Retirement, Retirement Plan, SEP IRA, Small Business

Millennial Wealth Management

Millennial Wealth Management is a fee-only registered investment advisor in Colorado. We educate and advise millennials and their families in the Denver and Boulder area, as well as other states virtually. As millennials, we understand the financial choices our generation is faced with, from navigating your first home purchase or tackling student loans. Our mission is to help our generation stop worrying about money.

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