Can You Have More Than One SEP IRA? What to Know About Multiple Accounts
Learn how having multiple SEP IRAs works, including contribution limits, tax implications, and rules for managing accounts across different employers.
A Simplified Employee Pension (SEP) IRA is a popular retirement savings option for self-employed individuals and small business owners due to its high contribution limits and ease of setup. Those with multiple income sources or businesses may wonder if they can open more than one SEP IRA and how managing multiple accounts affects contributions, taxes, and withdrawals.
Understanding the rules surrounding multiple SEP IRAs is essential to avoid tax penalties and maximize savings.
Establishing Multiple SEP IRAs
Opening multiple SEP IRAs depends on how income is earned. Each business a person owns can establish its own SEP IRA, meaning someone with multiple businesses could have separate accounts for each entity. However, if an individual works for multiple employers offering SEP IRAs, they cannot set up their own additional accounts—only the employer can establish the plan.
A business that sets up a SEP IRA must include all eligible employees, including the owner. If a person owns two businesses and each has a SEP IRA, contributions must be made for all eligible employees in both businesses. The IRS considers controlled groups—businesses with common ownership or significant control—when determining whether multiple SEP IRAs are truly separate. If businesses are related under these rules, they may be required to follow a single SEP IRA plan.
Contribution Limits per Account
The IRS sets annual contribution limits for SEP IRAs, but these limits apply per individual rather than per account. Total contributions across all SEP IRAs cannot exceed the lesser of 25% of compensation or $69,000 for 2024.
For those earning income from multiple businesses, contributions must be calculated separately for each entity. Each business can contribute up to 25% of the compensation it pays the individual, but the combined total cannot surpass the IRS limit. If one business reaches the maximum contribution, another cannot contribute additional funds beyond that threshold.
Individuals with both self-employment income and a job with an employer-sponsored SEP IRA must track contributions carefully to avoid exceeding the limit. The IRS does not aggregate SEP IRA contributions with other retirement plans like 401(k)s, but it does enforce the overall cap on SEP IRA contributions. Excess contributions are subject to a 6% excise tax per year if not corrected promptly.
Tax Consequences for Multiple SEP IRAs
Holding multiple SEP IRAs can create tax complexities, particularly regarding deductions and earnings. Contributions to SEP IRAs are tax-deductible for the business making them, meaning that if a person owns multiple businesses, each entity can claim a deduction for its respective contributions. These deductions must align with the business’s net earnings, and improper allocations can trigger IRS scrutiny.
Earnings on investments within SEP IRAs grow tax-deferred until withdrawals begin. Withdrawals before age 59½ are subject to a 10% early withdrawal penalty in addition to regular income tax. Taking distributions from multiple SEP IRAs in the same year could push a taxpayer into a higher income bracket, making strategic withdrawal planning important.
Coordinating Accounts with Multiple Employers
Managing multiple SEP IRAs across different employers requires careful oversight to ensure compliance with IRS rules. Each employer independently establishes and administers its own SEP IRA plan, meaning contribution schedules, investment options, and administrative policies may vary. Employees with multiple SEP IRAs must track each employer’s contributions separately while ensuring their total combined contributions remain within IRS limits. Employers are not responsible for coordinating contributions across different plans, so individuals must monitor aggregate deposits to avoid excess contributions.
Investment management becomes more complex when balancing multiple accounts with different custodians. Some employers may offer limited investment selections, while others provide broader access to mutual funds, ETFs, and individual securities. Diversification strategies should account for the combined holdings across all SEP IRAs to avoid over-concentration in specific asset classes. Differences in fee structures between custodians can also impact long-term returns. Consolidating accounts where permissible under IRS rollover rules may simplify administration, though rollovers must be executed correctly to avoid unintended tax consequences.
Required Minimum Distributions
Once an individual reaches age 73, Required Minimum Distributions (RMDs) must be taken from all SEP IRAs. These mandatory withdrawals are calculated annually based on the account balance as of December 31 of the previous year and IRS life expectancy factors. Unlike employer-sponsored plans like 401(k)s, SEP IRAs do not allow RMDs to be delayed past retirement if the account holder is still working.
Each SEP IRA is subject to its own RMD calculation, meaning individuals with multiple accounts must determine and withdraw the correct amount from each. While the total RMD amount can be taken from any combination of traditional IRAs, SEP IRAs, or SIMPLE IRAs, failing to withdraw the full required amount results in a 25% penalty on the shortfall. Consolidating SEP IRAs into a single account may simplify compliance with these distribution requirements.