What is a SEP IRA?

A simplified employee pension individual retirement account (SEP IRA) is a retirement savings plan designed for self-employed individuals and small business owners. However, any employer, including self-employed individuals, can establish a SEP.

SEP IRAs offer a straightforward and cost-effective way for employers to contribute to their own and their employees’ retirement funds. Employees do not make contributions; employers contribute on their behalf.

Contributions made by the employer are tax-deductible and grow tax-deferred until the time of withdrawal at retirement. SEP IRAs allow employers the flexibility to adjust their contributions each year based on business performance.

SEPs are simple to set up and administer, as well, making them an attractive option for self-employed individuals and small businesses. To set up a SEP, employers must:

  1. Adopt a formal written agreement by signing the IRS model SEP (Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement); an IRS-approved prototype SEP offered by banks, insurance companies, and other qualified financial institutions; or an individually designed SEP plan document.
  2. Provide each eligible employee with the SEP information, including a copy of the Form 5305-SEP if that was used in the agreement.
  3. Set up a SEP-IRA for each eligible employee with a qualified financial institution like a bank or insurance company. (The employee owns and controls their SEP-IRA.)

Refer to the IRS for more on employee eligibility and setup requirements.

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