How to Open a SEP IRA

Read our Advertiser Disclosure.
Contributor, Benzinga
April 5, 2021

Have you been thinking about how to open a SEP IRA? This straightforward, tax-advantaged retirement account can help you build the savings you need to live comfortably once you are no longer working. As a small business owner, you may also decide to open a SEP IRA for your employees. 

We’ll go over the ins and outs of SEP IRAs and share the most important information you need to know before you open this type of retirement account. Here’s how to open a SEP IRA and more. 

What is a SEP IRA?

A Simplified Employee Pension Plan, also known as a SEP IRA, is a traditional IRA specifically designed for self-employed individuals, sole proprietors and small business owners. 

SEP IRAs allow this group of people and their employees to access a tax advantaged retirement savings account, especially if they don’t have a 401(k)

How do I Open a SEP IRA?

Wondering how to open a SEP IRA? Any small business owner with few to no employees and freelancers can open a SEP IRA. It’s essentially as simple as opening up any other investment or retirement savings account

Here are the steps:

  1. Find a trusted account provider or broker. 
  2. Head over to your broker’s website or get in touch with them in person. This is the most common way to open a SEP IRA for yourself. Be prepared to provide personal information such as your address, Social Security number and so on.

If you are planning to open a SEP IRA for your employees, the process looks a bit different. Still, you’re going to have to start with your broker. From there, make sure to adhere to the following steps. 

  1. Draw up a written agreement to provide benefits to all eligible employees. You can do this with your broker or through the IRS Form 5305-SEP
  2. Communicate eligible employees information about the agreement. You can do this by providing them a copy of IRS Form 5305-SEP or by sharing relevant information provided by your broker. 
  3. Finally, work with your broker to set up a SEP IRA account for each eligible employee. 

Best IRA Brokers Online

If you’re on the fence about how to open a SEP IRA or don’t know where to start, take a look at our top picks for the best IRA brokers online. 

Try Augusta Precious Metals

You can also try Augusta Precious Metals when you want to purchase gold bars. You can add to your collection at any time, and the firm uses enhanced security protocols so that even the driver making the delivery doesn’t know what’s in the package. You may also start a coin collection, or you can set up a Gold or Silver IRA that will help you save for retirement.

How a SEP IRA Works

A SEP IRA works similarly to a traditional IRA and 401(k). In fact, the biggest difference between a SEP IRA and these other retirement accounts is that a SEP IRA is specifically designed for self-employed people or small business owners. 

Just like a traditional IRA and 401(k), contributions to a SEP IRA are pre-tax. This means, you can take a set amount of money out of your paycheck before it is subject to income tax and deposit it into your SEP IRA account. Contributions and expenses incurred while opening a SEP IRA may also be tax deductible. 

The investments in your SEP IRA account will grow tax deferred until you decide to make withdrawals. You can begin to make withdrawals from your SEP IRA account when you are 59 ½ years old. 

If you decide you need the money in your SEP IRA before you reach this age, you may be subject to a 10% early withdrawal penalty fee. The good news is that there are exceptions to this rule. For instance, if you are planning on buying your first home or paying for certain college expenses. 

SEP Contributions and Limits

Contribution limits on a SEP IRA are higher than on other IRAs or 401(k) plans. The maximum you can contribute towards a 401(k) plan in any given year is $19,500. 

While IRA contributions are maxed out at $6,000 annually, there are some exceptions to these rules. For example, you’re able to contribute more if you are 50 years old or older. 

Still, SEP IRA contributions limits are much higher — almost 10 times higher. In 2021, a SEP IRA allows you to contribute as much as $58,000 annually. 

As large as this number may be, there are still some regulations. You’ll have to take care to ensure your contribution doesn’t exceed 25% of your annual income. 

Advantages of a SEP IRA

Like most retirement savings accounts, SEP IRAs come with unique benefits. One of the biggest advantages of a SEP IRA over other retirement accounts, like traditional IRAs, Roth IRAs and 401(k) plans, is the higher contribution limit. 

As of 2021, you can contribute up to $58,000 annually to your SEP IRA. While there are still some restrictions (namely that your contribution can’t be greater than 25% if your annual income) this higher limit is an advantage unique to SEP IRAs. 

Other advantages of a, SEP IRA include:

  • Tax-deductible contributions
  • Investments can grow tax-deferred 
  • Can be combined with a Roth IRA or a Traditional IRA
  • No required annual contribution 
  • Opening a SEP IRA is as easy as opening any other investment account

Disadvantages of a SEP IRA

Considering how to open a SEP IRA can be a great step towards securing your retirement. Even though SEP IRAs come with a host of advantages, there are some downsides unique to these retirement accounts. 

It’s important to be aware of the disadvantages of a SEP IRA in order to know whether this option works for you and your employees. Take a look. 

Immediate Vesting

Vesting pertains to the portion of an employee’s retirement plan made by their employer. Assume that as a business owner, you decide to match a percentage of your employee’s contributions to their SEP IRA account. 

With immediate vesting, the money you contribute automatically becomes theirs. If they decide to leave your company after only a month, they’re still entitled to take the portion of funds you’ve contributed with them. 

No Loans Permitted

Qualified plans, including 401(k) plans, allow account owners to borrow up to the lesser amount of either $50,000 or 50% from their balance. However, IRA accounts and SEP IRAs don’t permit borrowing against the value of your investments. 

Employee Eligibility Requirements

SEP IRAs are most common amongst freelancers and small business owners with no employees. Some business owners may opt to open a SEP IRA for their employees, but before they do so they must be aware of employee eligibility requirements.

Know that for every employee who holds a SEP IRA, you, as the business owner, will have to contribute on their behalf. Furthermore, employee contributions must be equal in percentage to your own contributions. This means that if you want to contribute 10% of your own income to a SEP IRA, you’ll also have to contribute 10% of every employee’s income into their own SEP IRA. 

Aside from these, SEP IRA employee eligibility requirements include: 

  • Must be 21 years or older
  • Must have worked for your business for at least 3 of the past 5 years
  • Must have earned at least $600 in wages in the past year
  • Employees must own and control their own accounts

Who is Eligible for a SEP IRA?

Any small business owner, freelancer or sole proprietor is eligible for a SEP IRA. A small business owner’s qualifying employees are also eligible for a SEP IRA. 

Look into a SEP IRA

Now that you know how to open a SEP IRA, the next step is deciding which investments to hold in your account. You’ll be able to pick from different stocks, bonds and index funds your broker provides. 

Be mindful of developing your own unique investment strategy tailored to your age, income, risk preferences and more. If you need help planning out your investment strategy, make sure to consult with a professional, such as a financial advisor. 

Frequently Asked Questions


How much do you need to open a SEP IRA?


There are no minimum requirements for opening a SEP IRA. 


How much will a SEP IRA reduce my taxes?


This largely depends on your income level and personal tax bracket. However, in most cases you will be able to deduct your SEP IRA contributions and any expenses you may face setting up a SEP IRA account.