How Do Simplified Employee Pension (SEP) IRAs Work?

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Simplified Employee Pension (SEP): (source: retirementliving.com)

A Simplified Employee Pension (SEP) is a voluntary retirement plan that an employer can establish for employees and also for themselves.

Each year, an employer can decide whether it wishes to make an annual contribution to each qualified employee through this retirement plan. These funds must be deposited into a traditional Individual Retirement Account or Annuity (IRA).

The employee is then free to decide how these employer contributions should be allocated within their IRA. It is a “simplified” retirement plan since the employer (typically self-employed individuals) is not required to submit any type of form or paperwork to the IRS. In contributing to this plan, the employer must adhere to certain rules and requirements as spelled out in IRS form 5305-SEP, the contents of which are discussed below.

In addition, some of the more important rules and regulations are summarized. These voluntary employer-sponsored retirement plans are also compared to other self-funded retirement plans, like traditional IRAs.

How do SEP IRAs Work?

SEP IRAs must be established and set up by an employer.

To set up these plans, the employer must first choose a SEP IRA account provider like a brokerage or other financial institution that is authorized to administer IRAs. Then, the employer must develop a formal written agreement.

IRS Form 5305-SEP is a single page of instructions regarding what this written agreement must contain. Alternatively, the SEP IRA account provider can prepare this document. Then, if the employer has one or more employees, the employer must give all eligible employees information about the SEP IRA.

To meet this obligation, employees must also be given a copy of IRS Form 5305-SEP. The account provider can provide this information to each eligible employee as well.

Next, the employer needs to establish a separate SEP IRA account for each eligible employee with the selected account provider.

As a final step, the employer will deposit designated contributions with the account provider and then these funds will then be deposited in each of the employees’ accounts. Employees can then choose from the investment options that the account provider offers. These options commonly include stocks, bonds, mutual funds, and ETFs.

All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form. Thomas Wettermann is not an independent financial advisor.

Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. You may possibly sustain a loss of some or all of your initial investment; therefore, you should not invest money you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.