Small business owners, and those who are self-employed, can offer employees (and themselves) a tax-deferred retirement savings plan similar to the plans offered by larger corporations—but without incurring the high start-up and operating costs of a conventional retirement savings plan such as a 401(k).

However, there are also some important differences. While 401(k) plans are funded with pre-tax compensation from employees (sometimes supplemented with a full or partial match by the employer), all contributions made to a SEP plan must come from the employer on behalf of the employees. Although employer contributions are a deductible business expense.

Tax-deferred SEP IRA retirement plans:

• You may contribute up to 25%¹ of your compensation² or $70,000 (whichever is less) for 2025 and $72,000 for 2026.
• You can contribute to a SEP IRA every year you are self-employed and have earned income, regardless of your age. 
• You can adjust your contribution percent each year as the situation warrants.
• You have until your business’ tax filing date plus extensions to set up and fund a SEP.³
• You must start taking required minimum distributions (RMDs) in the year you turn 73, or 75 if born in 1960 or later.

If you take a distribution before age 59½, you would normally be subject to income taxes and a 10% early distribution penalty. The 10% penalty may not be imposed if the following conditions apply:

• You are totally and permanently disabled.
• You (and your spouse) are a first-time home buyer(s), in which case you can use up to $10,000 from your SEP to make a down payment on a home.
• You are using the distribution (in excess of 7.5% of your adjusted gross income) to cover unreimbursed medical expenses.
• You use the money to pay health insurance premiums while you’re unemployed.
• You use the money for qualified higher education expenses.
• You have a new baby or adopt a child. You may withdraw up to $5,000 from your SEP IRA without a penalty. The withdrawal must be made within one year after the birth or adoption date. Within three years of the distribution, you may repay the value withdrawn to an eligible retirement plan. The payment may be treated as a rollover.
• For more information, see Exceptions to tax on early distributions. 

Although you would not pay a penalty on money withdrawn after 59½ (or if you qualify for an early distribution exception), your distribution would be considered taxable income in the year of the distribution.

Here are several other key facts to know about a SEP plan for small business owners:

• If the employer makes contributions on their own behalf, they must also make contributions on behalf of all eligible employees.
• Employees are always 100% vested in (or, have ownership of) all SEP IRA money.
• The employer can adjust the contribution percentage each year as the situation warrants.
• Any employees who are at least age 21 and worked for you at any time in three out of the prior five years must be included in the SEP plan. And employees who earn $750 in 2025 or 2026 will also be eligible.
  • For instance, someone who worked for you in 2022, 2023, and 2024 would be eligible for your plan, and you would be required to make a contribution for him or her for the 2025 plan year.
  • If you want to stash away 15% of your compensation for yourself, you must also contribute an amount equal to 15% of that employee’s compensation to his or her SEP IRA. Although the contribution comes directly from the company rather than from the employee’s wages, the employees own and control their own accounts.
  • If you are an employee with a SEP IRA account, you can:
    • Keep your money in the SEP IRA.
    • Transfer your money to another SEP IRA.
    • Roll over your money to a traditional IRA, Roth IRA (this is a taxable event), a 401(k), a 403(b), or 457(b) account in which you participate if the receiving plan accepts rollovers.

How to set up a low-cost retirement plan for your small business

Establishing a SEP plan for your business involves maintaining a plan document. The IRS provides a prototype document called the 5305-SEP, Simplified Employee Pension. That is a matter that you may choose to handle through your tax advisor or on your own. (For more details, see IRS article How do I establish a SEP?)

Once your business has completed the required IRS form, you and your employees will be able to open SEP IRA accounts with a qualified financial institution to receive the contributions and enable participants to invest their funds. While contributions come from the employer, each employee owns and controls their own SEP IRA account.

Thrivent Asset Management offers a SEP IRA account that enables you to choose from all-in-one investments or build your allocations according to your specific objectives. Whether your goal is accumulation or distribution, Thrivent Asset Management offers simple solutions to diversify investments based on your risk tolerance. If you are offering a SEP as a business owner, or are participating in an existing SEP plan, consider opening a SEP IRA through Thrivent Asset Management to save for your retirement.

¹ Self-employed owners who file Schedule C are limited to 20% of net earned income.

² For Schedule C filers, it would be net earned income; for Schedule C or Sub S Corporation filers, it would be W-2 income.

³ IRS.gov, Retirement Plans FAQs regarding SEP contributions