SEP-IRA Pros and Cons

| September 9, 2010 | 0 Comments

A SEP-IRA is a Simplified Employee Pension plan in the form of an IRA (Individual Retirement Account).  A SEP-IRA allows employers a easy way to contribute to their employees' (and their own) retirement.  To fund a SEP-IRA, an employer contributes directly to an IRA for each employee in an equal percentage basis (See IRS Publication 560).  The most common participants in SEP-IRA retirement plans are small business owners and self employed individuals, but S and C corporations, LLCs and partnerships qualify also.


  • Annual contributions to a SEP-IRA can be as high as 25% of W-2 compensation or $50,000 (2012 limit, 2010 and 2011 were limited to $49,000), whichever is less.  Sole proprietors are allowed up to 20% of net self employment income.
  • Contributions can be flexible and are not required every year which allows for companies to reduce or eliminate contributions in years with lower profits.
  • Contributions to a SEP-IRA are tax deductible.
  • Administrative costs are lower than for more complex retirement plans.
  • An employer usually does not have any filing requirements associated with a SEP-IRA after the initial set-up.
  • Contributions are not included in employees' gross income (unless they are excess contributions).
  • A SEP can be established even if an employee takes part in a retirement plan from another company.
  • A SEP-IRA can be terminated at any time and contributions can be terminated at that time.
  • Contributions to a SEP-IRA are fully vested immediately.
  • Each individual SEP-IRA account can (and should) be catered to each employee's personal needs.
  • Employer contributions made to a SEP-IRA do not affect a participant's ability or amount he or she contributes to an IRA.
  • Contributions are not taxed, but just as in a 401(k) or traditional IRA, distributions are taxed.
  • A SEP-IRA can be a key motivator for employees who understand the employer's contributions may increase when the company makes larger profits.


  • Contributions are made by employers, not the employees as in a salary reduction plan such as a 401(k) or 403(b).
  • Contributions percentages must be the same for each eligible employee, i.e. an employer cannot pay himself or herself a higher percentage than any employee.
  • All employees who are eligible must be included.  Exceptions may include employees who have worked for the company for less than three of the past five years, those under 21 years old and those who have been paid less than $550 in compensation (2010 limits).

Talk to your AF Capital Mangement investment advisor representative for help in establishing a SEP-IRA for your business.

This is a brief overview of some of the benefits and drawbacks of a SEP-IRA.  AF Capital Mangement does not provide tax advice and the information above should not be construed as professional, legal or tax advice.


Filed Under: Planning, Retirement

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