How is a SEP Different From an IRA and 401(k)?

Simplified employee pensions (SEPs), while not technically qualified employer-sponsored plans, provide the opportunity for employers to make contributions to employee retirement accounts. Employees own and manage their own SEPs, so the employer’s administrative cost is minimal. Additionally, employers offering SEPs are not required to make set or recurring contributions to employee plans, so contributions can be made at the employer’s discretion. However, all employer SEP contributions must be made to each eligible employee and the same percentage of compensation must be contributed for each individual.

SEPs offer several unique advantages. An employer offering a SEP can contribute and deduct as much as 25 percent of its covered payroll. Further, the contribution limit for individual employees is relatively high — 25 percent of compensation up to a maximum of $49,000. SEP benefits make the plan attractive to small businesses and self-employed individuals.

Again, SEPs are only investment vehicles, and participants must choose underlying investments to purchase within their accounts. SEP contributions are deductible on the employee’s income tax return, and investments inside a SEP grow tax-deferred. Funds distributed from a SEP are considered ordinary income. Generally, distributions from a SEP before the employee turns 59.5 will suffer a 10 percent penalty. Minimum distributions from SEP accounts are required at age 70.5.

About the author

Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as and (by The Wall Street Journal). Additionally, Lon is an expert author at Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or Learn more about Net Worth Advisory Group at and visit Lon's blog at

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