If I Start a Limited Liability Company (LLC), Can I Open a SEP IRA?

You can, if you follow these rules

Reviewed by Ebony HowardFact checked by David Rubin

A limited liability company (LLC) is indeed eligible to establish a Simplified Employee Pension (SEP) IRA, which was designed to make it easy for small-business owners, self-employed individuals, and freelancers to set up tax-advantaged retirement plans.

But if you elect to hang your own small business shingle, be mindful of the fact the rules vary depending on whether or not you are a sole proprietor, whether or not you have rank-and-file employees, or whether or not your business is a corporation.

Key Takeaways

• An LLC is eligible to set up a SEP IRA for retirement savings.
• As of 2024, SEP contributions cannot exceed $69,000 per year.
• Rules regarding contributions can vary depending on whether the LLC is for a sole proprietor, a corporation, or has employees.
• If you work for yourself, you may set up a SEP, making it attractive to freelancers.
• If you hire employees, they can be set up under a SEP plan.

SEP IRA Contribution Limits

The IRS allows employers to contribute as much as 25% of an employee’s gross annual compensation. For LLCs set up as unincorporated businesses, such as sole proprietorships, partnerships, and limited liability partnerships (LLPs), plan contributions may be up to 20% of the business owner’s modified net profit. In 2024, the annual contribution made under either of these scenarios cannot exceed $69,000 (up from $66,000 in 2023).

Should you decide to hire employees, they must also be covered under the plan if they meet the eligibility requirements.

Credit for SEP IRA Plans

Under the Further Consolidated Appropriations Act, 2020, credit for start-up costs associated with creating eligible employer plans, including SEP IRAs, spiked to 50% of qualified startup costs up to the greater of the following two values:

1. $500
2. The lesser $250 multiplied by the number of staffers, or $5,000

An additional $500 in credit applies to eligible employer plans that offer automatic enrollment features. Both credits may be applied for up to three years after the launch of a small business.

Important

Only employers, including the self-employed, can make contributions to a SEP IRA. To learn more about setting up a SEP IRA, read IRS Publication 560.

Contribution Rules for Corporations

Keep in mind that employer-sponsored retirement plan contributions (including SEPs) are usually based on W-2 wages if the business is a corporation. This means that you may need to pay yourself W-2 wages in order to be eligible to receive a SEP contribution from the business.

How To Establish a SEP IRA

According to the IRS, there are three steps to setting up a SEP IRA. First, you can set up a SEP using a formal written agreement using an IRS-approved prototype SEP (which can be obtained from banks, credit unions, insurance companies, and some other qualified financial institutions), an individually designed SEP plan document, or an IRS model SEP using a Form 5305-SEP, Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement. 

Next, give your employees (or yourself) the information and paperwork for the SEP you set up, and finally, physically set up a SEP-IRA for each eligible employee (or yourself) with a qualified financial institution such as a bank or insurance company. It is important to note that the employee owns and controls their SEP-IRA.

The deadlines for establishing a SEP IRA and for making contributions are the same. It is the filing deadline for the employer’s tax return, including extensions.

Advisor Insight

Scott Bishop, CPA, PFS, CFP®
STA Wealth Management, LLC, Houston, Texas

If you have your own company, whether you are an LLC or even a sole proprietor (in which you report your income on Schedule C of your personal 1040 tax return), you can open and fund a SEP IRA. It’s an employer plan that you will fund with company money, in contrast to a 401(k) or Traditional IRA/Roth IRA that you fund personally.

You are able to fund up to 20% of your company earnings. So if your company makes $200,000, you can defer $40,000 into the plan.

For 2024, the maximum contribution can be $69,000 or 25% of total compensation (if you are the only employee) up to $345,000, whichever is less. For high-income sole-member LLCs, a SEP IRA is a great way to go. If you are making less, other options may be better, like a Solo 401(k) or a SIMPLE IRA.

Special Considerations

If you decide to open a SEP as a sole proprietor or if you have employees and you plan to open a SEP employer plan, the rules are similar to opening a traditional IRA, which is funded with pre-tax dollars. When you take out your money for retirement, you will be taxed at your ordinary tax rate, but you must keep the money in the account until you are 59½ or older, or you will get hit with a 10% penalty for early withdrawal, with a few exceptions.

For instance, if you take money out to pay for education, the penalty will not apply, just like with a traditional IRA. Because the money invested in a SEP IRA is pretax and you can put in up to $69,000 (as of 2024), not only can you save a lot of money quickly, but if you were to fund your account with the full amount allowed, you would drop your taxable income, which in turn could mean paying a lot less in taxes.

If you are setting up SEP accounts for employees, you must contribute the same percentage across the board based on each salary. Employees are eligible if they have worked for you at least three of the five years preceding the year when the IRA contribution occurred, earned $750 (as of 2024) or more, and are older than 21 years of age. Loans are not permitted, so the funds must stay in a SEP-IRA.

How Can I Open a SEP IRA for My LLC?

Like a traditional or Roth IRA, you can open a SEP IRA account online or in person at your preferred financial institution, like a bank or brokerage firm, or credit union. Just select an account provider, create a formal agreement using IRS Form 5305-SEP (or via your account provider), and then distribute the information about the SEP to your employees, or if you are opening just for yourself, keep the information handy. You must set up individual SEP IRAs for each employee, including yourself.

What Is the Max You Can Put in Your SEP IRA?

In 2024, the max amount you put into your SEP IRA, if you are a self-employed individual is 25% of your net earnings from self-employment, up to $69,000. This amount is usually adjusted on an annual basis.

What Is a SEP IRA?

A SEP IRA is a retirement plan, similar to a traditional IRA, designed for both the self-employed and business owners of any size. SEP IRAs are often used by self-employed, freelancers, and small businesses, in particular, rather than another kind of plan because they have low administration costs and are easily set up online.

The Bottom Line

If you are an LLC, a SEP IRA may simplify you to open a retirement account with tax advantages. Freelancers, small business owners, and self-employed individuals can benefit from a SEP IRA due to its simplicity in set-up and high annual contribution limit, up to $69,000 a year in 2024. If you are opening SEP IRAs for your employees, there are a few rules and regulations to consider, but these accounts provide opportunities to build retirement dollars. There are a few downsides. Namely, there is no catch-up contribution for older workers, and you cannot take out loans from these accounts.

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