SEP-IRA Contribution Limits For 2024 And 2025: Maximizing Retirement Savings

Retirement planning is crucial for ensuring future financial security, especially for small business owners and self-employed individuals who lack access to employer-sponsored plans like the 401(k). Choosing the right retirement savings plan and maximizing retirement savings can be a complex landscape to navigate, but it’s key to staying fiscally fit in the twilight years. This article explores maximizing retirement savings through three popular retirement options designed specifically for small businesses and self-employed individuals—the SEP-IRA, Simple IRA and Solo 401(k) to support a roadmap to retirement wellness.

What Is A SEP-IRA?

A simplified employee pension (SEP) is a simple, low-cost strategy for small business owners to contribute to retirement savings for themselves and their employees. Contributions are made to an individual retirement account (IRA) set up for each plan participant. Self-employed individuals also can set up a SEP-IRA for themselves. A SEP does not incur the start-up and operational costs associated with a traditional retirement plan and permits contributions of up to 25% of each employee’s salary.

Who can contribute to a SEP-IRA?

A self-employed individual can contribute to their own SEP-IRA. However, if a business owner sets up a SEP-IRA for their employees, only the employer is allowed to make contributions. Employees cannot contribute to their SEP-IRA accounts, although they are 100% owners of the account and have more control over how the SEP-IRA funds are invested.

To participate in a SEP-IRA plan, the employees should be at least 21 years old, should have worked for the employer for at least three of the last five years, and received at least $750 in compensation for 2024 from the employer’s business. Last but not least, the employee’s compensation eligible for SEP-IRA contributions is capped at $345,000 for 2024.

Employers may choose to relax the above participation norms for eligible employees, but cannot make the requirements more restrictive. However, employers may exclude employees whose retirement benefits are covered by a union agreement and non-resident alien employees from participating in the SEP.

SEP-IRA: Tax Treatment

For tax purposes, a SEP-IRA is typically treated like traditional IRA. SEP-IRA contributions are tax-deductible for employers and the self-employed, while growing tax-deferred for employees. The funds are taxed as ordinary income at prevailing income tax rates at the time of withdrawal of funds by the employee. Contributions made to a SEP-IRA are not subject to federal income tax withholding, Social Security, Medicare and federal unemployment (FUTA) taxes.

While the SEP-IRA is typically treated like a traditional IRA, the SECURE Act 2.0, passed at the end of 2022, introduced the Roth SEP IRA, which allows SEP-IRA contributions to receive Roth treatment.

The employer makes SEP contributions directly to the designated financial institution, which oversees the management of the funds. Employees are responsible for making individual investment decisions, allocating their respective SEP contributions into various investment options, such as stocks, mutual funds, money market funds, savings accounts, and other similar financial instruments.

Funds in a SEP-IRA can be rolled over to a Roth IRA but the conversion is taxable and the employee owes taxes on the contributions, as well as on any earnings from the contributions that were not taxed previously. After a Roth conversion, the funds grow tax-free and qualified withdrawals during retirement are tax-free as well.

Much more than breaking news, our diverse reporting digs deeper with unparalleled insights that empower you to make better informed decisions. Become a Forbes member and get unlimited access to cutting-edge strategies, actionable insights, and updated analysis from our network of leading finance experts. Unlock Premium Access — Free For 25 Days.

SEP-IRA Contribution Limits For 2024

Quick Takeaways:

• The maximum contribution limit for a SEP-IRA for 2024 is 25% of the employee’s compensation (or) $69,000, whichever is lower.
• The maximum compensation that can be considered for SEP-IRA contributions in 2024 is $345,000.
• There is no provision for catch-up contributions in SEP-IRA. However, contribution limits for a SEP-IRA are significantly higher than most other retirement savings options even in the absence of catch-up contributions.

The SEP-IRA is straightforward for a self-employed individual, who can make contributions ranging from 0% to 25% of their net income (calculated as earnings from self-employment minus half of the self-employment tax and any contributions to their own SEP IRA), with maximum contributions of $69,000 for 2024 and $70,000 for 2025.

However, for business owners contributing to a SEP-IRA, the rules get more complex. When a business owner decides to contribute to their own SEP-IRA, they are required to contribute the same percentage to all eligible employees as well. The contribution percentage varies from 0% to 25% of each employee’s salary with a maximum contribution of $69,000 for 2024, while the maximum compensation that can be considered for contributions is $345,000. There is no provision for catch-up contributions, but given SEP-IRA’s high contribution limits vs. most retirement plans, the drawback is less significant. SEP IRA contributions for 2024 can be made until the tax filing deadline, which is April 15, 2025.

For an employer, the flexibility to adjust contributions is a major advantage. The employer can make larger contributions in profitable years, reduce contributions in lean years, or even skip contributions altogether in particularly difficult years, all without triggering additional paperwork. The only stipulation is that the employer must contribute the same percentage of compensation to each eligible employee’s account during the years of contribution. But the downside to the rule is that it can limit the employer’s ability to make large contributions to their own SEP-IRA, as the contributions to employees must match the percentage they contribute to themselves.

SEP-IRAs do not allow catch-up contributions–which are additional sums that individuals aged 50 and above can contribute beyond the standard contribution limits for retirement plans. Viewed as a tax-advantaged option to accelerate retirement savings in the last few years leading up to retirement, catch-up contributions allow older workers to reclaim lost ground. However, even without catch-up contributions, SEP-IRA’s contribution limits are higher than that for most retirement savings plans.

SEP-IRA Vs. Traditional/Roth IRA Contribution Limits For 2024

Traditional IRA or Roth IRA accounts are usually opened by employees in the absence of an employer-sponsored retirement plan like the 401(k). However, IRA accounts can be opened even if the participant already has 401(k) plans in place.

The maximum IRA contribution limit for 2024 is $7,000 for those under 50, and an additional $1,000 in catch up contribution for those 50 and older. For the tax year 2024, a taxpayer filing as a single individual must have an income of less than $161,000 in order to be eligible to contribute to a Roth IRA. However, there are no income limits to contribute to a traditional IRA. Traditional IRAs, unlike the Roth IRAs, allow the taxpayer to contribute the maximum contribution limit regardless of income earned, as long as the taxpayer’s earnings are higher than the year’s contribution thresholds.

The contribution limits for IRAs apply to the combined limit for both traditional and Roth IRAs. While the participant can contribute to both types of IRA accounts, the total contributions cannot exceed the annual IRA contribution limit, or the participant may face tax penalties.

SEP IRA Contribution Limits For 2025 Vs. Other Retirement Plans

Quick Takeaways:

• The maximum contribution limit for a SEP-IRA for 2025 is 25% of the employee’s compensation (or) $70,000, whichever is lower.
• The maximum compensation that can be considered for SEP-IRA contributions in 2025 is $350,000.
• There is no provision for catch-up contributions for SEP-IRA in 2025, despite which SEP-IRAs continue to offer higher contribution potential, compared to other retirement plans.

The SEP IRA contribution limits for 2025 compare favorably with other retirement plans.

IRAs (Traditional and Roth)

The contribution limit for IRAs in 2025 remains at $7,000 for individuals under age 50, with an additional $1,000 catch-up contribution for those 50 and older. For Roth IRAs, contributions are limited by income, with eligibility phased out for single filers with incomes above $165,000. However, Traditional IRA contributions are not subject to income limits, though tax deductibility may be affected if the individual or their spouse participates in an employer-sponsored plan.

401(k) Plans

For a 401(k) account, the contribution limit increases to $23,500 in 2025 from $23,000 in 2024. The catch-up opportunity for the traditional 401(k), and Roth 401(k) plans, is an additional $7,500/year in 2024 and 2025, boosting a tax payer’s contribution potential for 401(k) plans to $30,500 in 2024 and $31,000 in 2025. A higher catch-up contribution limit of $11,250 (vs. $7,500) applies to employees aged 60 through 63, for 401(k) plans in 2025, improving the contribution potential of employees in this age group to $34,750 for 2025. This still falls short of SEP-IRA contribution limits.

SEP-IRA: Withdrawals/Distributions Rules

Employees can make withdrawals from a SEP-IRA upon reaching age 59 1/2, at which time the qualified distributions are taxed at prevailing income tax rates. If withdrawals are made before age 59 1/2, an additional 10% penalty is applicable for these premature or early distributions. However, the penalty can be avoided:

• For distributions (of up to $10,000) if the participant qualifies as a first-time home buyer.
• If the distribution is for qualified higher education expenses.
• If the distribution (of up to $5,000 per child) is for a qualified birth or adoption expense.
• If unreimbursed medical expenses account for more than 7.5% of the participant’s adjusted gross income (AGI) for the year. AGI is defined as the income from all sources minus (or adjusted for) expenses the taxpayer paid for with income that the government deems should not be taxed.
• If the participant is paying health insurance insurance premiums during a period of unemployment.
• If the distribution (of up to $22,000) is for disaster recovery.
• A distribution of up to $10,000 or 50% of account, whichever is lower, for distributions made after 12/31/2023, if the participant is a victim of domestic abuse by a spouse/domestic partner.
• If the distribution is after the death of the SEP-IRA owner.
• If the distribution is made to an alternate payee under a Qualified Domestic Relations Order—a legal document that gives an alternate payee the right to receive some or all of a participant’s retirement plan benefits.
• If the distribution of up to $1,000, is for personal or family emergency expenses, subject to one distribution per calendar year.
• If the distributions are determined as a series of substantially equal periodic payments (SoSEPP) over the taxpayer’s life expectancy (or over the life expectancies of the taxpayer and the taxpayer’s designated beneficiary).
• If the distribution is for qualified military reservists ordered to active duty.
• If the IRS directly levies the employee’s SEP-IRA to satisfy tax debt, the penalty is waived.
• If the distribution is of a corrective nature to fix excess contributions.
• If the distribution is used for rollover to other retirement accounts within 60 days.
• If the distributions are equal to the amount paid for family health insurance by an unemployed individual.

Solo 401(k) Vs. SEP-IRA

The Solo 401(k), or self-employed 401(k), or Independent 401(k), or One-participant 401(k), or Uni-k, as it is known by many names, is a tax-advantaged retirement plan available for small-business owners with no employees (other than a spouse). For those looking to save aggressively for retirement, Solo 401(k) can be an excellent strategy.

Like the SEP-IRA, the Solo 401(k) has high contribution limits of up to $69,000 for 2024. In a Solo 401(k), contributions can be made in both capacities, as an employee and as an employer.

As an employee, the business owner can contribute up to $23,000 for 2024 if under 50 years of age, or a maximum of $30,500 (including $7,500 in catchup contributions), if age is 50 years or more. For 2025, the contribution limit is $23,500 with an additional $7,500 in catch-up contributions.

As an employer, the business owner can contribute up to 25% of compensation from the business or up to $69,000 for 2024 (and $70,000 in 2025). Including catch-up contributions, the ceiling for Solo 401(k) contribution for 2024 is $76,500.

Key Differences Between SEP-IRA And Solo 401(k)

1. No catch up contribution provision for SEP-IRA, but Solo 401(k) has a catch-up contribution of $7,500 for 2024.
2. SEP IRAs are funded by employer contributions alone, while Solo 401(k) allows both employer and employee contributions, maximizing retirement savings.
3. If the business owner decides to hire more employees other than the spouse, the Solo 401(k) plan will no longer be applicable and the business owner may have to switch to a different retirement plan.
4. A participant can borrow from a Solo 401(k) plan, but no loans can be taken from a SEP-IRA account.
5. With a Solo 401(k), the employer is responsible for contributing only for themselves and their spouse (if any). But with a SEP-IRA, the employer must contribute the same percentage of compensation for all eligible employees, which can significantly increase the contribution burden for the employer and limit their own SEP-IRA contributions.

Discover more in-depth insights, entrepreneurial advice and winning strategies that can propel your journey forward and save you from making costly mistakes. Elevate your journey by becoming a Forbes member. Unlock Premium Access — Free For 25 Days.

Simple IRA Vs. SEP-IRA

A Simple IRA (savings incentive match pLan for employees) allows contributions from employers and employees to IRAs set up for employees. The Simple-IRA can be considered as a start-up retirement savings plan for small business owners not currently sponsoring a retirement plan. The plan is available for small businesses with 100 or fewer employees and there is no filing requirement for the employer. Employers are required to make a matching contribution of up to 3% of employee compensation, or 2% nonelective contribution for each eligible employee.

The “nonelective” contribution option mandates that the employer must contribute 2% of the employee’s annual compensation (up to $345,000 for 2024), regardless of whether the employee contributes.

If the employer opts for matching contributions of up to 3% of the employee’s annual compensation, the employee is required to contribute to the Simple IRA in order to receive a matching contribution from the employer.

To be eligible for a Simple-IRA plan, an employee (including a self-employed individual) should have

• Earned at least $5,000 in compensation from the employer during any two preceding calendar years (not necessarily consecutive) and
• Is expected to receive at least $5,000 in compensation during the current calendar year.

The employee contribution limit for a Simple IRA is $16,000 in 2024 if the employee is under 50. A catch-up contribution of $3,500 can be made by employees aged 50 and above. However, the SecureAct 2.0 introduced changes in limits for some Simple IRAs.

One of the notable changes for Simple IRAs is the increase in contribution limits for employers with 25 or fewer employees. Specifically, the elective deferral limit for employees under 50 increases by 10%, from $16,000 to $17,600 for 2024. The catch-up contribution limit increases by 10% as well, from $3,500 to $3,850 for employees aged 50 or older. Employers with 26-100 employees may provide the higher deferral limits to employees only if they offer a 4% matching or 3% nonelective contribution.

For the 2025 tax year, Simple IRA participants between the ages of 60-63 can make a super catch-up contribution of $5,250.

Starting in 2024, employers can make an additional nonelective contribution of up to 10% of an employee’s compensation, capped at $5,000.

Simple IRA plans can allow employees to choose to contribute on a Roth basis (after-tax contributions), rather than make traditional pre-tax contributions. This means employees can pay taxes upfront on their contributions, but qualified withdrawals during retirement will be tax-free.

A Simple IRA can be rolled over into a Roth IRA or to an employer-sponsored retirement plan without a two-year waiting period (which was a prerequisite prior to the Secure Act 2.0 of 2022).

Withdrawing funds from a Simple IRA before a mandatory two-year period may be treated as premature or early withdrawals, triggering a 25% early distribution penalty – which is significantly higher than the usual 10% penalty for early withdrawals from other retirement accounts.

However, this penalty can be avoided if:

• The employee is 59.5 years old or older.
• The withdrawal is for unreimbursed medical expenses exceeding 10% of the employee’s adjusted gross income (7.5% if their spouse is 65 or older).
• The withdrawal is for their medical insurance costs while unemployed.
• The withdrawal is for qualified higher education expenses.
• The withdrawal is for the purchase, construction, or rebuilding of a first home.
• The withdrawal is taken in the form of an annuity.
• The withdrawal is a qualified reservist distribution.
• The employee is disabled.
• If the withdrawal is for the beneficiary of a deceased Simple IRA owner.
• If the withdrawal is due to an IRS levy.

Key Differences between a Simple IRA Vs. SEP-IRA

In a SEP-IRA, only employers are allowed to contribute. Simple IRA allows both employees and employers to contribute.

SEP-IRA has no catch-up contributions as these are made by employers. Simple IRA allows catch-up contributions for participants who are 50 years old or older.

Simple IRA rules mandate that employers contribute some amount to their employees’ accounts via two options, while in a SEP-IRA the employer is not obligated to contribute. The Simple IRA appears better for an employee because it guarantees that employee will receive an employer contribution, while a SEP-IRA offers no guarantees that the employer will contribute.

A full employer match up to 3% of employee compensation is a great strategy to maximize retirement savings for the employee under the Simple IRA. To receive a match, the employee needs to make a contribution to their Simple IRA. This is in stark contrast with the SEP-IRA, which is purely funded by employer contributions.

For seasonal businesses with varying cash flows, a SEP-IRA may be more suitable, because during lean periods for the business, an employer may not choose to contribute at all. Whereas businesses with steady cash flow can opt for a Simple IRA in the absence of any other retirement plan.

Maximizing Retirement Savings Contributions

Solo 401(k)

For a business owner flying solo with just their spouse working for them, a Solo 401(k) is an excellent tool to maximize retirement savings, offering the highest contribution limits. By allowing the business owner to contribute as both the employee and employer by way of employee salary deferrals of up to $23,000 (or $30,500 if participant is 50 or older for 2024) and employer profit-sharing contribution of up to $69,000 for 2024, the Solo 401(k) is a standout choice. However, any expansion of business to include more employees will require a switch to a different retirement plan.

SEP-IRA

The SEP-IRA has high contribution limits, comparable with the Solo 401(k). However, the SEP-IRA is funded completely with employer contributions, which can fluctuate at the employer’s discretion based on the financial performance of the business. The employer is not obligated to contribute and this introduces a degree of uncertainty for employees, who cannot make direct contributions to their SEP-IRAs.

For employers, the flexibility in adjusting SEP-IRA contributions is advantageous, particularly during years of financial strain. However, this same quality can restrict the employer’s ability to make substantial contributions to their own retirement savings, due to the mandate that contributions be made at an equal percentage for all eligible employees. This obligation may impose a significant financial burden on the employer.

To circumvent this limitation, employers may establish additional retirement plans, such as individual IRAs or explore strategies like the backdoor Roth IRA to enhance personal retirement savings. Employees may also set up their own IRAs and utilize Roth conversions to optimize retirement savings beyond the limits of the SEP-IRA.

The SEP-IRA is particularly beneficial for self-employed individuals seeking to maximize their retirement contributions beyond the limits of traditional IRAs. The SEP-IRA is also well-suited for small businesses with a limited number of employees. With fewer employees, the employer’s contribution obligations become more manageable, allowing for equal contributions to employees’ SEP-IRA accounts while enabling the employer to make solid contributions to their own account.

Simple IRA

While the contribution limits of the Simple IRA are not in the leagues of the SEP-IRA and Solo 401(k), it offers the advantage of guaranteed employer contributions – which are either in the form of a matching contribution of up to 3% of compensation, or 2% non-elective contribution. A matching contribution of up to 3% of compensation from the employer will maximize retirement savings for employees within a Simple IRA account.

The increased contribution and catch-up limits for employees and additional non-elective employer contributions under the Secure Act 2.0 should further support the goal of optimizing retirement savings for Simple IRA participants. To augment savings, employees can do a Roth rollover and/or can contribute to more than one Simple IRA plan, provided the employers are not related and the employee adheres to the annual contribution limits.

Bottom Line

Summing up, a Solo 401(k) shows the potential to bring the best retirement benefits for an entrepreneur flying solo with probably the exception of a spouse working for them. A SEP-IRA plan funded by employer-only contributions works better for small businesses with fewer employees to maximize the contribution potential of the employer. SEP-IRA is also well suited for a self-employed individual who is seeking to optimize retirement savings beyond the limits of IRAs. A Simple IRA appears like a good fit for employees as it offers the benefit of guaranteed employer contributions regardless of the employees’ own contribution to their retirement account. The provisions from the Secure Act 2.0 further bolsters the case for a Simple IRA.

Disclosure: All said, the article has barely scratched the surface of the myriad retirement plans available to small business owners and self-employed individuals. To determine the retirement plan that most effectively aligns with your financial objectives, it is advisable to consult with a qualified financial planner. Please note that I am not a registered investment advisor and readers should do their own due diligence before investing in any securities mentioned in this article or anywhere. I am not responsible for the investment decisions made by individuals after reading this article. Readers are asked not to rely on the opinions and analysis expressed in the article and encouraged to do their own research before investing.

Read Next

Whether it’s mastering cutting-edge strategies, uncovering actionable investment opportunities from influential leaders, or breaking down complex topics, our in-depth journalism has you covered. Become a Forbes member and gain unlimited access to bold ideas shaking up industries, expert guides and practical investment advice that keeps you ahead of the market. Unlock Premium Access — Free For 25 Days.