Simplified Employee Pension Plan (SEP)
A SEP is a tax-advantaged retirement plan designed for self-employed individuals and small business owners. It allows employers to contribute to their own and their employees’ retirement savings in a straightforward, flexible way.
Key Features:
Contributions: Employers can contribute up to 25% of an employee’s compensation or $70,000 for 2025 (whichever is less). For self-employed individuals, contributions are based on net self-employment income, with a similar cap.
Tax Benefits: Contributions are tax-deductible for the employer, reducing taxable income. Funds in the SEP grow tax-deferred until withdrawn.
Flexibility: Contributions are discretionary—employers can adjust or skip contributions annually based on business performance.
Eligibility: Any business, including sole proprietorships, partnerships, or corporations, can establish a SEP. Employees must be at least 21, have worked for the employer for 3 of the last 5 years, and earned at least $750 in 2025.
Example:
- John, a business owner, earns $200,000 in net self-employment income in 2025. ve a reliable income stream for life or a set period.
- He contributes 25% of his income, or $50,000, to his SEP.
- This reduces his taxable income to $150,000.
- The $50,000 in the SEP grows tax-deferred until retirement, and John can flexible premium contributions in future years based on his income.
SEPs are ideal for small businesses or self-employed individuals seeking a low-maintenance, high-contribution retirement plan with significant tax benefits.
