SEP IRA – A Complete Guide by Midland Trust

SEP IRA – A Complete Guide by Midland Trust

What Is a SEP IRA?

SEP IRA stands for Simplified Employee Pension (SEP) Individual Retirement Account (IRA). A SEP is a basic individual retirement account. SEP IRAs provide business owners with a simple method of contributing to their and their employees’ retirement savings. Businesses of any size can set up a SEP, including self-employed individuals.

Who Is Eligible For a SEP IRA?

Often, SEP plans work best for sole proprietors and small businesses with few to no employees. Employers must contribute to their employees’ plans if they are eligible participants. They must contribute an equal percentage to their own plan as well.

For example, Jane owns a small business and earns $84,000 per year. She contributes 16% of her salary to her SEP account yearly. Jane has 8 eligible employees. This means Jane must contribute 16% of their salaries to their SEP plans.

Eligible participants include those who are 21 or older and have worked for the business for three of the last five years. They must have earned at least $650 in the last year (2021).

Your plan may use less restrictive requirements for eligibility than those stated by the IRS. Maybe you only require the employee to be 18 years of age or older. Or, you only require one year of service rather than three. You can set your own eligibility terms.

It can be costly for a large business to contribute equal percentages to employees’ SEP plans. This is why small businesses and self-employed individuals most commonly utilize SEP IRAs.

SEP IRA Benefits

Minimal Fees

SEP IRAs have minimal start-up and facilitation fees. For small business owners and self-employed individuals, this is a big benefit.

Higher Contributions

SEP IRAs also have flexible, tax-deductible employer contributions and allow for higher contributions versus comparable retirement plans. With a SEP, you can contribute up to 25% of your earned income. Traditional IRAs, for example, have contribution limits of $6,000, or $7,000 with catch-up contributions for those 50 and older (2021).

You can also do a rollover or transfer for existing IRAs or employer-sponsored plans into a SEP IRA. Doing this increases your SEP funds for investing or saving.

Investment Options

One of the greatest benefits of SEP IRAs is that they allow for self-directed investing. You can invest in any permissible alternative asset to build retirement wealth.

When you invest in alternative assets with a SEP, all the investment’s gains grow tax-deferred until retirement. Once you retire, you will take distributions taxed as normal income. These distributions are mandatory once you reach 72. These distributions are called RMDs (required minimum distributions).

How to Open a SEP IRA

Step 1

Choose a financial institution. This institution serves as the trustee to hold your investments.

Step 2

Complete a written agreement to provide all eligible employees with benefits.

Step 3

Provide your employees with information about the agreement. They must be made aware of the SEP adoption, the requirements for receiving an allocation, and your contribution basis.

Step 4

Set up a SEP IRA account for each eligible employee.

Investing With a SEP IRA

You can invest your SEP IRA in the investments your account provider offers. Traditional account providers only offer stocks, bonds, and mutual funds. Self-directed account providers allow you to invest in both traditional and alternative investments.

Alternative investments include private placements, futures, real estate, private equity, and more.

Steps to Invest

First, you have to open your SEP IRA account. Next, fund your account via a rollover, transfer, or contribution. Lastly, select an investment.

You should always consult with a financial advisor or CPA. They will determine which investments are best for you and your retirement goals.

A SEP IRA Plan Example

Sam works for Canoe-a-Roo, a canoe rental company located in Seattle. Canoe-a-Roo decides to set up a SEP plan for its employees. They chose this plan type because the tourism industry in their city is cyclical.

In years with mild weather, they can make larger contributions. When the weather remains colder longer, they may see a decrease in business. In these years, they can reduce their contribution amount to their employees’ plans. Canoe-a-Roo’s contribution rate (large or small) must be the same for all its employees.

Canoe-a-Roo chose Midland Trust as the financial institution that will handle their plan. Midland Trust allows investors to invest in a broad range of alternative assets. This means Sam can invest in almost anything with her SEP IRA.

SEP IRA Contributions

With a SEP IRA, you can save 9.5 times more than you could with a Traditional IRA. As mentioned above, you can contribute up to 25% of your earned income. But, your annual contributions may not exceed $58,000.

With SEP IRAs, there is no catch-up contribution for those 50 and older. But, the amount that you can contribute far exceeds other plans.

You have until the income tax filing deadline of the following year (including extensions) to contribute to your SEP IRA. You are not required to contribute to your SEP plan every year. Learn more about SEP IRA contributions on the IRS’s website.


A SEP is simple to operate. Your account trustee handles contribution deposits and investments. It also provides annual statements and IRS-required filings. You need to make sure your plan remains compliant with the current law.

To ensure your plan is operating within the IRS’s rules, conduct an annual review. The IRS provides a checklist you can use for the review.


Typically, SEPs do not have to file annual financial reports with the Federal Government. SEP IRA contributions are not included on Form W-2.

The plan’s trustee provides the IRS and employees with an annual statement. This statement includes fair market value information on Form 5498. The trustee also reports on Form 1099-R for any distributions taken from your employees’ accounts. The trustee sends the 1099-R to individuals who took a distribution and the IRS.

Monitoring the Trustee

You are responsible for monitoring the SEP IRA account trustee to ensure it is doing all that is required. Check that its fees are reasonable for the services provided. If you find the trustee is not doing its job correctly or its fees are too high, consider replacing your trustee.

Correcting Operation Mistakes

The US Department of Labor and the IRS have correction programs to help employers with correcting SEP plan errors. These programs protect members’ interests and keep the plan’s tax benefits. A frequent review of your plan will allow you to find errors faster. Be sure to have these errors corrected as soon as possible.

How to Terminate a SEP Plan

If you decide to terminate your SEP plan, you may consult with your plan trustee. They will discuss other retirement plan options that may work better for you and your business.

To end your plan, you must notify the trustee. You should also notify your employees. This does not require any notice to the IRS.

Which Retirement Plan is Right for My Small Business?

If you are unsure if a SEP IRA is right for your small business, there are other options to consider. Read our article “Retirement Plans for Small Business Owners.” This article compares SEP IRAs, SIMPLE IRAs, and Individual 401(k)s.

About Midland Trust

The Midland umbrella of companies is a leading custodial services provider focused on self-directed IRA accounts, 1031 exchanges, and private fund custody services. In business since 1994, Midland is focused on providing clients with as many options as possible to defer or eliminate taxes. Midland has thousands of satisfied clients and billions of dollars in assets under administration. We possess the experience and knowledge to assist clients with their financial goals.

For questions about SEP IRAs or to start investing in alternative assets with your SEP IRA, contact Midland today. You can reach us at (239) 333-1032, or visit our website.

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