SEP-IRA stands for simplified employee pension individual retirement account, which is a type of IRA plan that allows more flexibility for employers than a traditional IRA account. Under a SEP-IRA, the employer does not have required annual contributions like a simple IRA, but instead, the employer has the flexibility to limit contributions when business is bad. Only employers can establish and contribute to a SEP-IRA, and they must do so at the same rate for all employees. Also, an employer’s contributions to a SEP-IRA remain tax deductible like other IRAs while keeping the low maintenance costs of a simple IRA. Furthermore, the annual contribution limits for a SEP-IRA is much higher than other IRAs. An employer can contribute up to the lesser of 25% of the employee wages or the annual cap which is at $58,000 as of 2021.
[Last updated in July of 2021 by the Wex Definitions Team]