Squeeze More Out of a Company SEP

If you want a retirement plan for your small company or self-employed business — but you don’t want to be buried in paperwork — consider a simplified employee pension plan or SEP.

4. SEPs allow for “look-back” contributions. As an example, you can make a SEP contribution, up until the date you file your tax return (including extensions), and deduct that contribution on that tax return.

5. Employees make their own investment decisions. All SEP contributions are fully vested and portable so that the employee takes their SEP accounts with them when they leave. In fact, SEPs are sometimes referred to as SEP-IRAs. The maximum contributions are 25% of compensation for employees, or 20% of self-employment income for sole proprietors, partners and LLC members. The absolute maximum amount that can be contributed to an account and deducted is $67,000 for 2023 (up from $61,000 in 2022).

6. Since the employees take their accounts with them when they leave or retire automatically, you do not have to offer for them to leave their funds in the plan (if they have over $5,000 in their account) which can lead to needing to track down the former employee at a later date (which could be years later).

All in all, if you are a small corporation or self-employed, the ease of a SEP may simplify your life and help fund your retirement. Consult with your tax advisor for more information.

Despite the Advantages, there Are a Few Downsides:

All of the SEP funding comes from you. And you may have to contribute on behalf of employees that you’d like to exclude.

If you have a large, relatively high-paid workforce, sponsoring a SEP can be expensive.

There is 100% vesting right away so you have little or no control over what each employee does with the money. If a staff member wants to take out their funds prematurely and pay the taxes and penalties right away, you can’t prevent it.

The best matchup for a SEP is a corporation with the owner being the sole employee, a partnership with no non-partner employees or a self-employed individual who files a schedule C with their 1040.