No 401(k)? No Problem. Why SEP IRAs Work for Some Small Businesses

SEP IRA can be a good option for sole proprietors or small companies seeking a plan that is flexible and simple to administer, with high limits on contributions.

When you’re in charge of your own business, you are busy working on current projects, chasing down new clients and finding new avenues of business. Administering a retirement plan may not be something you wish to spend your time on.

That’s why SEP IRAs are a popular choice for small businesses and the self-employed. Not only do they offer higher contributions than a regular IRA, they don’t come with the effort or costs associated with setting up a 401(k). Read on to see why you should consider a SEP IRA for your business.

Flexibility to Change Contribution Amounts Year to Year

A SEP IRA is an individual retirement account that is funded by an employer but managed completely by employees. An attractive option for solo business owners or small businesses who don’t want to administer a 401(k) plan, the SEP IRA can be a good choice for entrepreneurs hoping to substantially increase their retirement savings using cash flow from their business.

SEP IRA contributions are made by the employer only; employee pre-tax contributions from salary deferral are not permitted. Employers can contribute up to 25% of an employee’s compensation (or 20% if you’re self-employed) or $69,000 a year – whichever is smaller. Contributions are immediately vested.

Perhaps the most attractive feature of a SEP IRA is that annual contributions are completely discretionary. A business owner can provide a maximum $69,000 contribution one year and no contribution the following year. This flexibility makes SEP IRAs an attractive choice for businesses with less predictable cash flow. A downside is that all eligible employees must receive the same level of contribution. If an owner wants to give themselves the full 25% of compensation (up until the maximum $69,000), all other employees must also receive a 25% contribution. Like a traditional IRA or 401(k), contributions to a SEP IRA are all tax deductible.

SEP IRAs are easy to set up and maintain. Unlike 401(k)s, there are no administration forms you need to file annually with the IRS, meaning there are no administration or management costs to keep the plan going. As a result, unfortunately, you and your employees are on your own when it comes to choosing investments. Unlike a 401(k), there is no professional investment manager providing an investment menu of fund choices for a SEP IRA, so employees must either personally choose their own investments or work with an advisor on their own.

The deadline to open a SEP IRA is the same as your tax return deadline for the year (including extensions), meaning you can still open and fund a SEP IRA if you missed December deadlines on other plans. If you would like insight and assistance navigating your retirement plan options, give us a call at 844-377-4963 or use the Let’s Talk tool in the right sidebar.

Quick Facts – SEP IRA

  • 100% Employer funded
  • Annual contributions of 0%-25% of compensation, up to $69,000
  • Contributions are discretionary and can be changed year to year
  • All eligible employees must receive same contribution percentage
  • Easy to set up and maintain with no administration costs
  • Investments self-managed by employees


Windgate does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Data here is obtained from what are considered reliable sources. We consider the data used to be relevant and reliable.

First published 1/28/21.  Updated May 2024.

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