SEP IRA tax information

Learn about SEP IRA tax reporting, penalties and other tax implications that may impact your clients. When your client is ready to file their taxes, you can access their tax forms in Client Accounts and visit our Tax Center for additional resources.

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Contributions

Form 5498 is mailed by May 31, after the tax-filing deadline. Investors are not required to file Form 5498 with their tax return. If your client needs documentation of their current tax year’s contributions for their tax advisor, it can be found under the Transaction History section of the advisor website. Investors can also access their transaction history on the investor website.

The employer may be able to deduct the lesser of 25% of total employee income or the actual amount of the contributions. Special rules apply to self-employed individuals.

Consult a tax advisor to determine the actual deduction amounts that may be impacted if the employer is also claiming a startup credit.

Refer to A closer look at SECURE 2.0 Act startup tax credits for additional information about startup credits.

If the excess is not corrected prior to the tax-filing deadline, the employer may be subject to a 10% penalty. To remove an excess employer contribution, complete the Distribution Request for Excess Contributions From SEP/SARSEP IRAs.

Form 1099-R is used to report any excess contribution returns, and it’s issued for the tax year in which the distribution is taken and mailed by January 31 of the year following the transaction.

Refer to the IRS’s SEP Plan Fix-It Guide for more information.

Yes, eligibility for the nonrefundable Saver’s Credit is based on the IRA owner’s filing status and modified adjusted gross income (MAGI).

Tax-filing status	2023	2024
Single	Up to $36,500	Up to $38,250
Joint	Up to $73,000	Up to $76,500
Head of household	Up to $54,750	Up to $57,375

The credit rate available is based on the participant’s MAGI and is between 10% and 50% of the contribution. In 2023 and 2024, the maximum credit allowed is $1,000 ($2,000 if married filing jointly). Refer to Retirement Savings Contributions Credit (Saver’s Credit) for more information.

The employee can be subject to an IRS excise tax of 6% on contributions greater than the maximum allowable amount. To avoid this tax, they must remove all the excess contribution plus any excess earnings before their tax-filing deadline (including extensions). View Traditional IRA contributions for more information.

Distributions

Distributions are reported on Form 1099-R. This form reports the total amount of the distributions and any federal or state income tax withheld. If deductible and nondeductible contributions were made to an IRA, the investor must determine what portion of the distribution is taxable.

Form 1099-R is mailed by January 31 of the year following the distribution, and the information is also reported electronically to the IRS.

Since SEP IRAs accept only pre-tax employer contributions and traditional IRA contributions, distributions are taxable. However, if the SEP account includes nondeductible traditional IRA contributions, this portion of the distribution will not be subject to taxes or penalties when withdrawn.

Generally, an early distribution from an IRA prior to age 59½ is subject to being included in gross income plus a 10% additional tax penalty, unless an exception applies.

Nondeductible contributions are not subject to taxes or penalties.

During a calendar year, if the participant redeems less than their RMD, the difference not taken is known as an excess accumulation. The excess accumulation is subject to a tax penalty of 25%. It’s reported by the SEP IRA participant on IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. For more information about excess accumulations, refer to IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Please note: If the deadline to satisfy an RMD is missed due to reasonable cause, an IRA owner may ask the IRS to waive the penalty.

CB&T can withhold for federal and most state taxes but cannot withhold for any penalties. In certain situations, tax withholding is required:

A federal withholding election is not provided
The address of record is a P.O. Box, c/o or foreign address, and a permanent U.S. residential address is not provided
State withholding is required by the participant’s state of residence

For additional guidelines on federal and state withholding, visit IRA tax withholding.

Other tax questions

Effective for taxable years beginning in 2023, new and enhanced tax credits for smaller employers can make starting a retirement plan more affordable than ever.

Plan Cost Tax Credit: Certain small businesses are eligible for a tax credit that reduces the amount of federal taxes the business may owe during each of the first 3 years of its first-ever retirement plan. The credit covers 100% (if 50 or fewer employees*) or 50% (if 51 to 100 employees*) of the employer’s ordinary and necessary out-of-pocket plan costs up to an annual limit. The annual limit is $500 or, if greater, $250 multiplied by the number of plan-eligible non-highly-compensated employees, up to $5,000.

Employer Contribution Tax Credit: The employer contribution tax credit reimburses small businesses for a portion of the amount of employer contributions made. For smaller plans (those with 50 or fewer employees*), the tax credit starts at 100% of employer contributions made for each employee earning less than $100,000 a year up to $1,000 and phases down over 5 years from plan adoption (100%, 100%, 75%, 50%, 25%). The tax credit for larger plans (those with 51–100 employees*) also phases down according to the same schedule but is subject to additional reductions.

It is important to note that both a deduction and a credit cannot be claimed for the same contributions.

Refer to A closer look at SECURE 2.0 Act startup tax credits for additional information. You can also visit Retirement Plans Startup Costs Tax Credit on the Internal Revenue Service’s (IRS’s) website.

* Employees who received compensation of $5,000 or more in the preceding year.

You may consult a tax advisor and/or refer to IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) or IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.

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SEP IRA tax information

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Return to SEP IRA >

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Have questions or need additional support?
Contact us 8:00 a.m. to 7:00 p.m. ET, Monday through Friday.

(800) 421-0180

Investments

RESOURCES & RESEARCH

PORTFOLIO SOLUTIONS

MORE OFFERINGS

OUR APPROACH

Insights

Capital Ideas Pro™: Access to special events, courses and consulting to help you grow.

CATEGORIES

FEATURED

LEARNING CENTER

Tools & Resources

CLIENT ACCOUNT SUPPORT

INVESTMENT TOOLS

RETIREMENT PLANS

About Us

SEP IRA tax information

Contributions

What tax forms will my client receive for their SEP IRA contributions?

Are employer contributions tax-deductible?

What are the tax implications when an employer contributes more than is permitted under the SEP IRA contribution limits?

Are traditional IRA contributions made into a SEP IRA eligible for a tax credit?

What are the tax implications when an employee makes an excess contribution to a SEP IRA?

Distributions

How are distributions reported to the IRS?

Are all distributions from a SEP IRA taxable?

What is the penalty for an early distribution (made prior to age 59½)?

What is the penalty if the participant doesn’t take their required minimum distribution (RMD)?

Will Capital Bank and Trust Company (CB&T) withhold for federal and state taxes or penalties when a distribution is taken?

Other tax questions

How can employers offset the cost of starting a SEP IRA plan?

Where can I get more information about the impact of a SEP IRA account on my client’s taxes?

Return to SEP IRA >

Contact us

Have questions or need additional support? Contact us 8:00 a.m. to 7:00 p.m. ET, Monday through Friday.

(800) 421-0180

Capital Ideas Pro™:Access to special events, courses and consulting to help you grow.

Have questions or need additional support?
Contact us 8:00 a.m. to 7:00 p.m. ET, Monday through Friday.