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5 Ways a SEP IRA Can Benefit Small Business Owners Thumbnail

5 Ways a SEP IRA Can Benefit Small Business Owners

By Trent Derrick, CMT

As a small business owner, it can be hard to save for retirement when there are so many other aspects of the business to worry about. Too often retirement planning ends up at the bottom of the to-do list. 

In fact, research shows that 34% of small business owners don’t have a retirement savings plan in place and 72% of businesses with 10 employees or less do not offer retirement plans to their employees. (1) Those numbers are surprising, but it doesn’t have to be that way.

A Simplified Employee Pension (SEP) IRA is a convenient way to beef up your retirement savings as an owner, while also providing a key benefit to your employees. Here are 5 ways a SEP IRA can be used to benefit your small business.

1. Tax-Deductible Contributions

A SEP IRA functions similarly to a traditional IRA, except as the owner, you set up and contribute to accounts for both yourself and your employees. Your contributions are tax deductible up to 25% of all participants’ compensation, or up to 25% of net earnings if you’re self-employed. (2)

According to the IRS, all employees must be allowed to participate in the SEP plan if they meet the following criteria:

  • Age 21 or older
  • Earned at least $650 in 2021
  • Worked for you for at least 3 of the last 5 years

By maximizing contributions to both your account and your employees’, you can greatly reduce your annual tax liability while also saving for retirement!

2. Higher Contribution Limits

In addition to tax-deductible contributions, SEP IRAs also offer higher contribution limits than other tax-advantaged retirement accounts. In 2021, the contribution limit for a SEP IRA is the lesser of 25% of an employee’s compensation or $58,000. (3) The limits on traditional and Roth IRAs, however, are only $6,000 per year ($7,000 if you’re over age 50). This makes SEP plans a highly efficient savings vehicle that can benefit both your employees and your bottom line.

3. Tax-Deferred Growth

Just like other IRAs, SEP IRAs offer tax-deferred growth on the investments in the plan which allows your savings to compound substantially over time. Contributions and earnings can be withdrawn according to the general rules for traditional IRAs. Earnings grow tax-deferred until retirement, at which point all disbursements are taxed as ordinary income. There is also a 10% penalty incurred on withdrawals before age 59½.  

4. Contributions Are Discretionary

One of the most enticing benefits of the SEP IRA is that you are not obligated to contribute the same amount every year. In fact, you don’t have to contribute at all. Contributions to these plans are flexible and discretionary, meaning that you can adjust your contributions as your cash flow changes. This ensures that you are never contributing more than you are bringing in.

In the years that you do contribute, though, you are required to make equal contributions as a percentage of compensation to all eligible employees. For instance, if you contribute 20% of your income to your own SEP IRA, you must then contribute 20% of every employee’s income to their respective accounts.

Because of this, SEP IRAs are generally recommended for self-employed individuals or small businesses with very few employees. 

5. Easy Setup & Maintenance

Last, but definitely not least, SEP IRAs offer easy setup and maintenance, which cuts down on the hassle and expense associated with traditional retirement plans. Unlike 401(k)s, for instance, SEP IRAs do not require you to file annual tax returns. 

You are also not responsible for the underlying investments in your employees’ accounts. As the employer, you simply choose the financial institution you want to work with and you open the accounts. Beyond that, it is the employees’ responsibility to choose and manage their own investments. 

Additionally, many financial institutions offer SEP plans with little to no management fees, making this a very inexpensive and attractive option for small business owners.

Get Started Today

If you’ve been thinking about starting a retirement plan for yourself or your employees but just haven’t gotten around to doing it, consider an SEP IRA. Don’t let this decision waste away at the bottom of your to-do list. Be proactive and start saving today! Book a consultation with me here or email me at trent@legacywm.com to review your options.

About Trent

Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. Trent is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning, cash flow management, retirement planning, and bookkeeping. Trent has a bachelor’s degree from the College of Charleston and studied economics at the University of South Carolina, Columbia. He is a Chartered Market Technician® (CMT). Trent serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. When he’s not working, Trent, a proud Eagle Scout, enjoys volunteering with the Charleston Animal Shelter’s outreach program. Trent and his wife love to cook international cuisines and host dinner parties with their friends. To learn more about Trent, connect with him on LinkedIn.


(1) https://www.prnewswire.com/news-releases/one-third-of-small-business-owners-lack-a-retirement-savings-plan-300833644.html

(2) https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps

(3) https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps