Saving for retirement is one of the most important steps any individual can take. Whether you are a small business owner, self-employed individual, or employee, having a retirement plan is essential for ensuring your financial security after retirement. 

An SEP is a retirement plan specifically designed for business owners to provide savings for their own retirement and that of their employees. Keep reading to learn more. 

What Does SEP Stand For?

SEP stands for Simplified Employee Pensions. SEPs are tax-advantaged retirement plans designed for business owners and self-employed individuals. With this plan, employers can set aside money (with tax advantages) for retirement for both their employees and themselves.

The Simplified Employee Pension (SEP) was established under the Employee Retirement Income Security Act (ERISA), a law that ensures retirement plans are legal and protected by the law. 

Key Features of an SEP Plan

To understand what SEP stands for, we must examine the key components of an SEP plan. 

Employer-sponsored retirement savings plan: 

Employers set up and administer SEPs, and only business owners can contribute to them. Employees are not permitted to contribute to their pension plan. However, employers can establish and contribute to their employees’ retirement plans. 

Higher contribution limits than traditional IRAs: 

Unlike traditional IRAs, SEPs have higher contribution limits. Traditional IRA contributions are capped at $7,000, while SEP has a maximum of $70,000. 

Flexibility in contribution amounts each year: 

There is no set amount of contribution required each year. Business owners can contribute more or less, making this a flexible retirement plan that adapts to the current business environment.  

How Does an SEP IRA Work?

SEP IRA Contribution Rules

Employers can contribute to a SEP up to 25% of their employees’ compensation, with a maximum contribution of $70,000 for 2025. Employers must also make equal contributions to all eligible employers. So, if you decide to contribute 15% to a SEP, you must do so for all of your employees.

An employee must be at least 21 years old, have worked for the employer for at least three of the last five years, and have received at least $750 in compensation for 2023 and 2024.

Employers may exclude an employee from a SEP if the employee is a nonresident alien with no U.S. wages or if the employee is covered by a union agreement that includes retirement benefits negotiated by the union and the employer. 

SEP IRA Tax Advantages

The Simplified Employment Pension plan comes with several tax advantages. First, contributions are tax-deductible by the employer. When you contribute to SEP, the amount is deducted from your taxable income. For example, if you earn $100,000 and contribute $20,000, you will pay $80,000 in taxes.

Second, funds grow tax-deferred until they are withdrawn at retirement. While in SEP, your money grows like an investment and is tax-free until you withdraw it.

Third, employees do not pay an immediate tax on their contributions. When employers contribute money to a SEP for their employees, it is not taxed, unlike a regular paycheck, which is taxed up front. The tax will be levied when the employee withdraws the contribution.

SEP IRA Withdrawal Rules

Withdrawals are taxed as ordinary income: When you withdraw funds from your SEP, you will be taxed just like a regular income. The tax applied is determined by the tax rate in effect on the date of withdrawal. 

Early withdrawal penalty: An early withdrawal penalty applies when funds are withdrawn before the account holder reaches the age of 59½. In this case, a 10% penalty may apply unless an exception is granted, such as for withdrawing funds to purchase a first home or to cover significant medical expenses. 

Required Minimum Distributions (RMDs): Beginning at age 73, individuals are required to start taking annual withdrawals. The IRS will also establish a minimum amount that must be withdrawn, based on the account balance and the individual’s life expectancy.

SEP IRA vs. Other Retirement Plans

SEP IRA vs. Traditional IRA

A SEP IRA has a higher contribution limit, up to $70,000, compared to the traditional IRA’s $7,000 limit. Unlike SEP, however, individuals are allowed to contribute to the savings accounts. SEP allows only employers or self-employed individuals to contribute. 

SEP IRA vs. Solo 401(k)

Setting up a SEP is less complex than setting up a 401(k) plan. However, a 401(k) allows for more options, particularly in terms of contributions, where both employers and employees can contribute to the account.  

SEP IRA vs. SIMPLE IRA

A simple IRA allows employees to contribute directly from their salaries (known as deferrals), with the employer providing an additional amount, as opposed to a SEP, which only allows employers to contribute. However, when it comes to contributions, SEP still has the highest limit compared to simple IRAs, with a maximum of $16,500 for those under 50.   

Why Work with Butson Financial Advisors, LLC?

Working with Butson Financial Advisors means connecting with a team that truly understands the needs of business owners, particularly in the area of retirement planning. We have extensive experience developing personalized investment strategies to help your SEP IRA grow, tailored specifically to your objectives and circumstances. Beyond that, our team provides clear guidance on navigating tax advantages, enabling you to save more money today while staying compliant with all relevant requirements. 

Furthermore, at Butson Financial Advisors, ongoing financial planning support keeps you on track for long-term success, adapting to your changing business and life circumstances. When looking for a partner who will always have your back, Butson Financial Advisors should be your clear choice. 

Conclusion

What does SEP stand for? A Simplified Employee Pension (SEP) is a retirement plan in which employers set up and manage accounts for themselves and their employees. Taxpayers benefit from an SEP in various ways, including tax-deductible contributions that can be deducted from regular income, funds invested in plans that grow and are tax-deferred, and employees who do not pay immediate tax on contributions. Furthermore, contribution limits are higher than in other IRAs, and the setup process is much simpler.

Work with Butson Financial Advisors, LLC to work towards your retirement, tax, and financial planning goals. Contact us today to help you pursue your financial goals.