Simplified Employee Pension (SEP) IRA: Pros and Cons

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. 

What are the Pros and Cons of SEP IRAs?

Like other retirement plans, SEP IRAs have a number of benefits as well as drawbacks. The table below summarizes a number of these benefits and drawbacks. 

SEP IRA Benefits:                             SEP IRA Drawbacks: 

Simple to set up and maintain                     Do not allow employee contributions 

High contribution limits                             Eligible employee restrictions Taxable income is reduced

Loans not allowed                                     Account transfers and rollovers are allowed

Required Minimum Distributions apply     No IRS reporting requirements

No Roth SEP IRA Contributions are voluntary, not mandatory Mandatory employee contribution(s) if self-employment contribution made

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