What is a Roth SEP IRA?
The Roth SEP IRA is a newly introduced retirement savings vehicle that blends the features of the Simplified Employee Pension (SEP) IRA with the benefits of a Roth account. As of 2025, this account is now available thanks to updates under the SECURE Act 2. It’s designed for self-employed individuals and small business owners who want to contribute significantly to retirement while enjoying tax-free withdrawals in the future.
- Like a Roth IRA, a Roth SEP IRA allows your investments to grow tax free, and qualified withdrawals in retirement are also without tax.
- It combines the high contribution limits of a SEP IRA with the tax advantages of a Roth, perfect for the self-employed or small business owner.
- Like a traditional SEP IRA, contributions to the plan are made by the employer to each eligible employee; there are no employee contributions.
Traditional vs. Roth SEP IRA
A traditional SEP IRA offers tax-deductible contributions but taxes withdrawals in retirement. On the flip side, the Roth SEP IRA allows after-tax contributions and tax-free withdrawals, assuming the account holder is at least age 59 1/2. and the account is open for at least five years.
Who is Eligible?
Eligibility generally includes:
- Self-employed individuals
- Small business owners with or without employees
- Those who meet standard Roth IRA income limits (more on that later)
Why the Roth SEP IRA Was Introduced
The SECURE Act 2.0, passed in late 2022 and coming into full effect in 2025, expanded retirement account options to encourage more savings. One major development was the option for Roth treatment in employer-sponsored plans, including SEP IRAs.
This shift aligns with the government’s broader initiative to boost tax-free retirement income flexibility.
Key Features
Tax Treatment
- Contributions are made with after-tax dollars
- The employee pays the taxes on the contribution, not the employer. The employer still reveives a tax deduction.
- Withdrawals (including earnings/growth) are tax free after age 59½, provided the account is at least five years old
Investment Options
Like other IRAs, SEP IRAs offer access to traditional investments such as stocks, bonds, mutual funds, and ETFs. When you self-direct your SEP, you can invest in non-traditional, or alternative, assets including real estate, private equity, precious metals and cryptos. The options are virtually limitless.
2025 SEP IRA Contribution Rules
Contribution Limits for Employers
- For 2025, employers can contribute up to 25% of an employee’s compensation, up to a limit of $70,000.
- These contributions must be designated as Roth at the time of contribution to qualify.
- Contributions must be made by your business’s tax filing deadline, including extensions (usually April 15 or October 15).
Employee Contributions
Unlike 401(k)s, traditional SEP IRAs do not allow employee deferrals. However, Roth SEP IRAs now allow Roth-style contributions, depending on the custodian’s offerings. This is still evolving, so not all providers may allow employee deferrals in 2025.
Income Limits and Roth SEP IRAs
Unlike regular Roth IRAs, the Roth SEP IRA does not impose income limits for the employer to make Roth contributions. However, income can impact your overall Roth eligibility, especially for rollovers or employee contributions (if allowed).
Tax Implications
Because Roth contributions are after-tax, contributions to the plan are not deductible. Qualified withdrawals are tax free. To be considered qualified, any IRA must have been open for at least five years and the IRA owner must be at least age 59 1/2. Failure satisfy both requirement may be penalized and lead to a tax burden. These are the same requirements for withdrawals. Early distributions are subject to tax and penalties.
RMD Rules
Required Minimum Distributions (RMDs) are withdrawals you must start taking when you reach the age of 73. However, since Roth SEP IRAs are funded with after-tax money, there are no required distributions from the plan. You may distribute from the plan, but you are not forced to, meaning your retirement savings can continue to grow unhindered.
Advantages of Roth SEP IRAs
Tax-Free Withdrawals
The biggest perk is enjoying tax-free growth and withdrawals, assuming you follow the rules, of course.
Ideal for Younger Investors
Younger professionals and freelancers with lower current income but high future income potential can lock in low tax rates now.
The Best of Both Worlds
The Roth SEP IRA combines the tax-free distributions of a Roth account with the high contribution limits of the SEP IRA. This is ideal for small business owners with or without employees.
Immediate Vesting
Employer contributions to an employee’s SEP IRA vest immediately, meaning the employee can access the funds immediately.
Disadvantages and Considerations
No Immediate Tax Break
Because contributions are after-tax, there’s no upfront tax deduction, which may not appeal to some business owners, especially those at or near their earning peak.
No Catch-Up Contributions
Unlike regular IRAs and 401(k) plans, there are no catch-up contributions allowed with a Roth SEP IRA. You cannot accelerate your SEP growth when you reach age 50.
Mandatory Employee Contributions
If a business owner contributes to their own SEP IRA, they must also contribute an equal percentage to the SEP IRAs of all eligible employees.
No Employee Deferral or Contributions:
Employees cannot contribute to their own SEP accounts or make elected deferral contributions to lower their current year’s taxes.
Comparing Roth SEP IRA with Other Retirement Accounts
Roth IRA vs. Roth SEP IRA
- Roth IRA: Ideal for individuals with moderate incomes, subject to income limits, and lower contribution limits ($7,000 in 2025).
- Roth SEP IRA: Best for self-employed and small business owners; allows higher contributions and employer funding.
SEP IRA vs. Roth SEP IRA
- Traditional SEP IRAs offer tax-deferred growth, whereas Roth SEP IRAs grow tax free.
- Roth SEP IRA contributions do not reduce taxable income, unlike traditional SEP IRA contributions.
Solo 401(k) vs. Roth SEP IRA
- Solo 401(k) plans allow both employee and employer contributions, potentially exceeding SEP limits.
- They also support the loan features, which Roth SEP IRAs do not.
How to Set Up a Roth SEP IRA
Choosing a Provider
Many financial institutions, including IRA Financial, now offer Roth SEP IRAs, but not all are equipped for the Roth designation. Look for:
- Roth contribution support
- Low, flat fees
- Wide investment choices (go self-directed if you want the most freedom)
Legal and IRS Reporting Requirements
- Use Form 5305-SEP or a custom SEP agreement.
- Keep proper documentation and clearly state Roth contributions.
- Financial institutions issue Form 5498 to report contributions.
- Employers must also maintain proper records for IRS verification.
Real-Life Scenarios: Who Benefits Most?
- Freelancers: With variable income, freelancers benefit from the flexibility and high contribution ceiling of a Roth SEP IRA.
- Small Business Owners: Owners who don’t need the immediate tax deduction can provide generous retirement benefits with tax-free future growth.
- Side Hustlers: Those with multiple income streams can funnel extra income into a Roth SEP IRA, building tax-free retirement funds efficiently.
Conclusion
The Roth SEP IRA and the contributions rules surrounding them represent a revolutionary step in retirement planning, especially for self-employed individuals and small business owners. With tax-free growth, high contribution limits, and small business owner flexibility, this new account type gives modern workers a unique advantage.
Whether you’re a solo entrepreneur, freelancer, or small business owner with (or without) employees, embracing this new option can significantly boost your retirement savings—without the tax bite down the road. Just make sure to follow the rules, avoid common pitfalls, and plan strategically to get the most out of your Roth SEP IRA.
Frequently Asked Questions
Who can open a SEP IRA?
Any business owner—including sole proprietors, partnerships, corporations, and freelancers—can open a Roth SEP IRA. Employees cannot open their own SEP but can receive contributions if their employer sponsors the plan.
Can I contribute to a traditional IRA and Roth SEP IRA?
Yes, you can contribute to a SEP IRA and also to a traditional (or Roth IRA), as long as you meet the income and contribution eligibility rules for those accounts. Pair your Roth SEP IRA with other accounts (like traditional IRAs) to diversify your tax exposure in retirement.
How do the taxes work with a Roth SEP IRA?
If the employee elects to make after-tax Roth SEP IRA contributions, the employee is responsible for paying the taxes. The employer gets a tax deduction on the amount contributed on the employee’s behalf?
Are Roth SEP IRAs subject to RMDs?
No! Since Roth plans are funded with after-tax dollars, you are never required to withdraw from the account.
When is the deadline to contribute to a SEP IRA?
The deadline to make contributions is the employer’s tax-filing deadline, including extensions. For most sole proprietors, this is April 15, but with an extension, it could be as late as October 15.
Can employees opt out?
If you’re an employee of a business offering Roth SEP IRAs, participation is generally required if eligibility rules are met.
What if my income exceeds Roth IRA limits?
Roth SEP IRAs are employer-based, so income limits don’t disqualify you from receiving contributions. However, it might affect your ability to contribute to a personal Roth IRA.
Can a Roth SEP IRA be rolled over?
Absolutely. You can roll over a Roth SEP IRA into a Roth IRA or Self-Directed Roth IRA without tax consequences.
