SEP IRAs: An essential guide

What's more, there's tax relief available for small business owners who want to help their employees prepare for retirement but hesitate to set up a plan due to the perceived expenses. Eligible small business owners may be able to claim a tax credit equal to 50% of the qualified start-up costs like administrative fees and employee education — up to a maximum of $5,000 annually, for three years. The credit is calculated based on several criteria, including having no more than 100 employees who received at least $5,000 of compensation from the employer in the preceding year. Small employers may also be able to claim an additional tax credit of up to $1,000 per eligible employee based on a percentage of employer contributions made to a start-up retirement plan, subject to meeting applicable conditions. Employers cannot deduct startup costs for which they claim a tax credit.

You have until your standard tax filing deadline to make contributions for you and your employees for the previous tax year. Generally, the filing deadline is March for partnerships and S corporations and April for C corporations and sole proprietorships. If you file for an extension, you can extend the time to make contributions until the extended filing deadline — generally, September for partnerships and S corporations and October for C corporations and sole proprietorships. Many small business owners find this helpful in managing cash flow.

If you (or your employees) later want to consolidate your savings plans to reduce paperwork or give yourself more control over your investments, you generally can move funds from a SEP IRA into another pre-tax retirement account, such as a traditional IRA or 401(k) or 403(b), without incurring taxes or penalties.

Only you as the employer may contribute to your eligible employees' plans (as well as your own). Your employees cannot fund their own accounts through payroll deductions, as they can with a workplace retirement plan like a 401(k). There is an exception for certain SEPs established before 1997, known as SARSEPs. Additionally, participants don't have the option of taking loans from their SEP IRAs.

SEP IRA contributions can be made to a traditional IRA or, for employers that allow it, a Roth IRA. As a result, a SEP IRA shares many features with IRAs, including tax-advantaged contributions/distributions, and for traditional IRAs, required minimum distributions when you reach a specified age (or following your death for Roth IRAs).

Yes, and if your SEP allows non-SEP contributions, your employees can make their own IRA contributions to the same account that holds their SEP contributions rather than maintaining a separate IRA. Any amount your employees contribute to this account will reduce the amount they can contribute to other IRAs. One cautionary note: While employees can contribute to their own traditional or Roth IRA, they are considered to be covered by a retirement plan at work — the SEP. This could have an impact on their ability to make deductible traditional IRA contributions.

As long as you have no employees, you can open an Individual 401(k) plan — also known as a solo 401(k) — which offers many of the same benefits you get with a SEP IRA, including high contribution limits and flexibility, and adds a few more benefits such as the option to take out loans. This chart shows how the plan features of SEP IRAs and Individual 401(k)s compare.