Introduction to SEP-IRAs

Introduction to SEP-IRAs

A Simplified Employee Pension Plan IRA (SEP-IRA) is one of the easiest small business retirement plans to set up and maintain. Clients can make sizable contributions and there's little administration. Tax filing is not required, and yearly contributions can vary, or be skipped.

SEP-IRA plans consist of an employer account and a separate participant account. Employers make tax-deductible contributions to the separate accounts for themselves, and for eligible employees.

Employer eligibility SEP-IRAs are for anyone who earns self-employment income, even if already covered by a retirement plan at work. Self-employed individuals or business owners, include: C corporations, S corporations, limited liability corporations with only a few employees, partnerships, independent contractors, and sole proprietors.
Participant eligibility Employees under 21 are eligible but are not required to participate. Schwab does not allow for SEP IRAs under age 18. All employees 21 or older who have met the following requirements must participate:
  • Employed with business at least 3 of the preceding 5 years
  • Earned at least $750 in the contribution year 
Employers can choose less restrictive eligibility requirements but may not be more restrictive. Employers can also exclude collective bargaining unit employees, non-resident aliens, acquired employees, and employees earning less than the defined compensation threshold.
Key features SEP-IRA features include:
  • Less paperwork than other plans
  • Provides flexibility to set aside a different percentage of income each year
  • Employer funded
  • Tax-deductible contributions
  • No annual IRS reports
  • Minimal administrative costs
  • Non-discrimination testing not required
  • Investments grow tax-deferred until withdrawn
  • IRS-approved
Pricing
  • Minimum opening deposit: $0
  • $0 account open or maintenance fees
Deadlines Plans must be established by the tax-filing deadline of the business (typically April 15, plus extensions) in order to contribute for that tax year. This is also the deadline for annual contributions. Schwab must report all contributions in the current year, but employers can report contributions made by the deadline for the prior year when filing taxes.
Contributions
  • Employer contributions only* 
  • Annual contributions not required
  • 100% immediately vested 
  • Social Security integration allowed Tooltip
* Employer and qualifying employees must receive contributions at the same rate of pay.

Note: It is the business owner/plan administrator's responsibility to ensure the business has the earned income to make contributions and prove the source of funds if audited by the IRS. Schwab, as the custodian of the account, is not responsible to monitor source of funds.
Contribution methods

Contribution limits apply.

Mobile Deposit Employers can make contributions to their personal SEP-IRA accounts using the Mobile Deposit function on Schwab.com or Schwaballiance.com up to the daily mobile deposit limit.
Direct Deposit (ACH) The employer can initiate contributions to employee SEP-IRA accounts from their own financial institution. Only SEP contributions are allowed via direct deposit, you cannot choose to have Traditional contributions into the SEP via Direct Deposit.
Journal SEP-IRA employer or Traditional IRA contributions may be made through a journal. All SEP contributions must be sourced from the business. Contributions for a plan with multiple participants are not eligible for online journals.
Check You or the client can send a check for deposit. Refer to Guidelines for check acceptance. You can also upload a check via Advisor Check Deposit but the correct contribution type needs to be selected.
Wire Your client can initiate a wire sent to their SEP-IRA account, but they need to work with the delivering bank to include a transmission note: THIS IS A SEP CONTRIBUTION.
Tax ramifications Employer contributions are tax-deductible up to 25% of total participant compensation. Earnings grow tax-deferred and are not taxed until they are withdrawn. Schwab reports all contributions and end-of-year fair market value on IRS form 5498 by May 31 of each year. See Introduction to tax reporting for more information.
Additional features
Roles and responsibilities The roles and responsibilities within a SEP-IRA include:

Investment advisor

Employer

Participant

Identifies and qualifies candidates Completes necessary forms Reviews the plan outline and completes the IRA Account Application
Answers client questions about the plan Provides plan information to participants and works with them to complete the necessary forms Directs and manages investments within their individual SEP-IRA
Works with client to complete and submit necessary forms to the Schwab service team Makes all annual contributions Works with employer to make changes, ask questions or request distributions
Rollovers Rollover guidelines include:

Rollover to:

Rules

Traditional IRA
Rollover IRA
Another SEP-IRA
60-day rollovers are allowed only once per 12 consecutive months per taxpayer. This is regardless of the number of IRAs owned. This limit applies to all individual IRAs, including, traditional, ROTH, SEP, SIMPLE—and treats them as one IRA for the purpose of the rollover limit. Direct rollovers and direct conversions are excluded from the limit. Clients must track their contributions.
QRP
Individual 401(k)
Receiving plans may accept or reject the rollover.
Conversions Participants can convert SEP-IRA assets to a Roth IRA. The conversion is taxable in the calendar year it occurred. The RMD age changes from 72 to 73 effective January 1, 2023. Clients 73 (if turned age 73 after 12/31/2022 or age 72 if turned age 72 on or before 12/31/2022) and over are subject to required minimum distributions (RMD) and must first distribute the RMD before they may convert any other assets to the Roth.
Distributions Normal distributions:

While SEP-IRA contributions are meant for retirement, participants may withdraw funds at any time. The distributed amount will be subject to ordinary income tax and, if under age 59 1/2, it may be subject to a 10% federal tax penalty. State tax penalties may also apply.

Hardship withdrawals:

Because you can withdraw funds at any time, there is no need to show a hardship to take a distribution.

Required minimum distributions (RMDs):
  • Participants must begin taking RMDs annually, beginning the year in which the participant reaches the federal RMD age.
  • Participants who do not fulfill the annual distribution requirement, risk being assessed a 25% IRS penalty on the undistributed amount. If the distribution is corrected within a timely manner (within two years), the excise tax on the failure is further reduced to 10%.
Withdrawal penalties The IRS will impose a 10% penalty on withdrawals before age 59 1/2 absent an applicable penalty exception. Those exceptions include:
  • Substantial Equal Periodic Payments
  • Some higher education expenses
  • Qualified first-time home purchases
  • Withdrawals due to disability or death
  • Non-reimbursed medical expenses of adjusted gross income
  • Qualified reservist distributions
  • A qualified birth or adoption distribution
Schwab does not determine if a distribution qualifies for an exception. Clients should consult with a tax advisor.
ERISA SEP plans that include employees are governed by Employee Retirement Income Security Act (ERISA) guidelines and rules.
Beneficiaries Participants can assign beneficiaries when opening the plan. They should update their beneficiary designations after significant life events such as marriage, divorce, or the birth or legal adoption of a child. See How to add and update account beneficiaries for more information.

Can Schwab withhold state taxes on my client's IRA distribution?
Yes. If the state has income taxes, then those taxes may be withheld in whole number percentages, at a rate equal to or greater than the state's minimum tax rate. Distribution recipients will need to report the distribution and proper withholding on their state tax forms.

Can my client convert a SEP or SARSEP IRA to a Roth IRA?
Yes. A SEP or SARSEP IRA can be converted to a Roth IRA. This is a taxable event.

Can my client open a SARSEP account?
No, however, they may be able to transfer their SARSEP to a SEP-IRA.

Do not forward originals of the actual plan trust agreement.

The following are available to assist you:

How to open a SEP-IRA account
How to roll over assets to a Schwab account
Introduction to cash options and investments
Introduction to custodial IRAs
Introduction to required minimum distributions (RMDs)
Introduction to Retirement Plan Solutions
Introduction to inherited IRAs
Introduction to Roth IRAs
Introduction to SIMPLE IRAs
Introduction to traditional IRAs

Participants should consult with their tax advisor if they have any questions about tax implications.

Find forms, guidelines, and other tax information on the irs.gov.

For more information, see: