Self-Employed Retirement Plan

Key facts

  • A self-employed SEP IRA offers tax benefits for the business and the business owner.
  • IRS contribution limits apply to self-employed SEP IRA accounts.
  • Distributions can be taken at any time. However, taxes and tax penalties may apply.

Self-employment can pose a variety of challenges, since you are responsible for managing all aspects of your business. Fortunately, saving for retirement doesn’t have to be one of those challenges. There is a self-employed retirement plan available for business owners who don’t want to miss out on the tax savings offered to other professionals. For example, the Simplified Employee Pension Individual Retirement Account (SEP IRA) for self-employed business owners offers one of the easiest and least-expensive options to build your retirement account.

Benefits of a Self-Employed SEP IRA

Rules for the self-employed SEP IRA are similar to those of a Traditional IRA; however, contributions are made by the business on behalf of the account holders. For self-employed business owners, the tax benefits of are two-fold.

First, the business benefits from favorable tax regulations. For example, contributions from the business to the SEP IRA are tax deductible, and the business may qualify for an additional tax credit during the first three years of the plan to offset administrative costs. IRS Publication 4333 offers additional detail on taking advantage of these tax savings.

Second, from the perspective of the account holder or self-employed business owner, contributions are not considered part of the year’s gross income. Any deposits to the SEP IRA are deferred on the account holder’s taxes, and taxes are not levied until funds are withdrawn from the account.

Self-Employed SEP IRA Rules

The tax-deferred status of your self-employed SEP IRA depends on your adherence to certain IRS requirements. One of the most important rules is that if you have other employees that meet eligibility requirements, you must set up and contribute to SEP IRA accounts for them as well. Business owners cannot create a SEP IRA for some employees but not others.

IRS rules state that the following employees are eligible to participate in the company’s SEP IRA plan:

  • Age 21 and older
  • Employee for three of the most recent five years
  • Paid $600 or more by the employer in the past year

Your plan can be less restrictive, but it cannot be more restrictive. Note that the income threshold for eligibility is reviewed by the IRS each year, and it may be adjusted for the cost of living.

There are limits to the amount business owners can contribute to their own self-employed SEP IRA accounts and to accounts set up for their employees. In 2016, the limit is 25% of your net earnings from self-employment up to a maximum contribution of $53,000. The IRS offers calculation worksheets to assist you in determining the correct amount.

You can withdraw from your SEP IRA account if necessary, at which time you will pay income taxes on the distributed amount. Bear in mind that if you take a distribution before you are 59 ½, a 10% tax penalty could apply. When you reach age 70 ½, you must take the required minimum distribution (RMD), even if you are still working.

Self-Employed SEP IRA Set-Up

Creating your self-employed SEP IRA is simple. The first step is to create a plan document for your business. A prototype is provided by the IRS for your convenience (Form 5305-SEP), or you can create a custom plan using templates available from your financial institution.

Next, if other employees will also participate in the program, you must distribute copies of the plan document. Finally, as the business owner, you will open individual SEP IRA accounts on behalf of each participant. Many self-employed business owners choose investment managers to invest and manage funds.

The self-employed SEP IRA is a convenient way to ensure your retirement savings grow along with your business. As the business owner, you enjoy a tax deduction on your business tax returns, along with personal tax-deferred contributions and earnings.


Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.

This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.