What is a SEP IRA?

A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a retirement plan allowing employers to make tax-deductible contributions to employee IRAs, with 2024 limits up to 25% of compensation or $69,000. For professional service firm owners, SEP IRAs offer high contribution limits with minimal administration.

Key characteristics

• Employer-funded retirement plan

• High contribution limits

• Simple administration

• Must include eligible employees

• Same percentage for all

• Flexible annual contributions

Why it matters for professional service firms

SEP IRAs offer significant tax-deferred retirement savings with minimal paperwork. The flexibility to vary contributions annually suits businesses with variable income. Professional service firm owners without employees often find SEP IRAs ideal for maximizing retirement savings.

Real-world example

Lisa's consulting income was $280,000. SEP IRA maximum contribution: 25% of net self-employment income (after SE tax deduction) equaled $52,000. Contributed $52,000 before the tax deadline, reducing taxable income and saving approximately $18,000 in taxes: no plan documents, no IRS filing, simple and effective retirement savings.