By Sarah Brenner, JD
IRA Analyst

It is not unusual for many workers today to have a side gig. They may have job, and it might even be full time, but it’s still not enough to make ends meet. So, they operate their own business on the side. The extra income can be welcome. It can also be an overlooked source for retirement savings. A Simplified Employee Pension (SEP) IRA plan can offer an easy and inexpensive way to fund your retirement with income from your side gig.

A SEP IRA plan is an employer sponsored retirement plan where contributions are made to employee’s IRAs.

The process for establishing and operating a SEP is very straight forward. Contributions, which are tax-deductible for you or your business, go into an IRA that you establish. For SEP purposes if you are self-employed, you are considered an employer. Only the employer makes SEP contributions. Salary deferrals are not permitted and catch-up contributions do not apply to SEP IRAs.

Once in the IRA the funds are like any other IRA funds and are subject to all rules that normally apply to IRAs. The funds immediately belong to the employee and they can do whatever they want with them, including taking a distribution. It is not unheard of for employees to immediately take distributions as soon as the SEP contributions are made. This may not be a smart move as far as saving for retirement, but is allowed. Distributions are taxable and will be subject to the 10% early distribution penalty if taken before age 59 ½, unless an exception applies.

One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. Generally, the SEP limit for 2019 is 25% of up to $280,000 of compensation, limited to a maximum annual contribution of $56,000. Special rules apply to determine exactly how much a self-employed person can contribute. You can find these at

SEP contributions can be made up to the due date of the tax return, including extensions. For example, a 2019 SEP contribution can be made up to April 15, 2020 or up to October 15, 2020 if a valid extension has been filed. Contributions are not required to be made every year. So, if your side gig has a bad year, you can skip your contribution for the year.

There is more good news. Even if you participate in a retirement plan at another job, you can still go ahead and fully fund a SEP IRA plan. You can also fully fund a Roth IRA if you are otherwise eligible. You may also be able to fully fund a traditional IRA, but deductibilty will phase out at higher income levels.