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SEP-IRAs: A Retirement Plan for the Self-Employed

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Being an entrepreneur has wonderful perks – being your own boss, setting your own schedule, unlimited profits. It also comes with some requirements – funding your retirement, providing yourself with health care options, and taking the risks of a variable income.

Saving for your retirement can be accomplished with a simple strategy – setting up a Simplified Employee Plan (SEP)-IRA. The SEP-IRA has great features and some limitations. Let’s take a closer look.


Features of a SEP-IRA:

  • Unlike a 401(k) or other employer retirement plan, which must be set up by December 31st, the SEP-IRA can be set up any time up to the tax filing deadline in April of the following year. Setting up the SEP-IRA is easy – requiring only Form 5305-SEP, Simplified Employee Pension – Individual Retirement Account Contribution Agreement, or a similar form from the custodian who holds your account (such as TD Ameritrade or Schwab).
  • SEP-IRAs are available to small businesses, including sole proprietorships, partnerships, LLCs, S-Corporations and C-Corporations. SEP-IRAs are often set up for the benefit of an individual who is the sole employee of the business.
  • Contributions are made by the employer.
  • The business owner may also be able to deduct plan expenses, including contributions, made to the plan.
  • Contributions can be variable – you can contribute more in the years you make more money and less in down years. You can even skip contributions for a year if necessary.
  • Like a Traditional IRA or 401(k), the contributions are tax-deferred until withdrawals are made.
  • In 2018, contributions can be made up to the lessor of: (1) 25% of compensation, or (2) $55,000. This contribution amount is much larger than simply funding a Traditional or Roth IRA, which have a maximum contribution of $5,500 (with a catchup contribution of an additional $1,000 for individuals age 50 or older).
  • Contributions can be made up to the tax return date of the following year. Contributions for 2018 are required by April 15, 2019.
  • Withdrawals are not required at age 70 ½ if you are still working, unless you own more than 5% of the business. If you own more than 5% of the business, you must take your required minimum distributions (RMDs).

Limitations of a SEP-IRA:

  • No loans can be taken from a SEP-IRA. Unlike a 401(k) plan, loans from the SEP-IRA balance are not allowed.
  • SEP-IRAs do not have a Roth option.

For more information on SEPs and IRAs, see IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), and IRS Publication 590, Individual Retirement Arrangements (IRAs).


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Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.

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