SEP IRA Under SECURE Act 2.0: Roth Contributions, Limits, and RMDs

A Roth SEP IRA is a Simplified Employee Pension in which the employee elects to have the employer’s contribution treated as Roth money: taxed as income in the year it’s contributed, then grown and withdrawn tax-free in retirement if the withdrawal is qualified. The option was created by Sections 601 and 604 of the SECURE Act 2.0, signed in December 2022, and it is the first time SEP IRAs have offered anything other than pre-tax treatment.¹

How the Roth Election Works

SEP IRAs are still funded only by the employer. Employees don’t defer salary the way they would in a 401(k); the employer decides on a percentage of compensation for the year and deposits that amount into each eligible worker’s IRA.² What changed is that the employee can now direct that deposit into a Roth IRA rather than a traditional IRA, provided the plan document permits it.

The election has to be in writing, and it applies going forward. Employees who make no election continue to receive traditional pre-tax contributions by default. Whichever side of the ledger the money lands on, the annual contribution ceiling is the same.

2026 Contribution Limits

For 2026, the employer contribution to any one employee’s SEP IRA is capped at the lesser of 25% of that employee’s compensation or $72,000.³ The maximum compensation counted in the 25% calculation is $360,000 for 2026. Both figures adjust for inflation over time.⁴

The employer must apply the same contribution percentage to every eligible employee in a given year.⁵ The rate can move between 0% and 25% from year to year, but within any one year it has to be uniform. Salary deferrals and catch-up contributions are not permitted in SEP plans.³

Self-employed people can open a SEP for themselves, but the math is different. Contributions are figured on net earnings from self-employment, and you subtract the deductible portion of self-employment tax before applying the 25% limit. The effective ceiling ends up closer to 20% of net self-employment income. Most self-employed filers rely on tax software or a professional to run the calculation.

Who Is Eligible

Under 26 U.S.C. § 408(k), a worker is an eligible employee for SEP purposes if they are at least 21, have performed service for the employer in at least three of the preceding five years, and have earned at least a minimum amount of compensation during the year.⁶ The 2026 compensation threshold is $800.⁴

An employer can loosen these standards (lower age, shorter service, smaller compensation floor) but cannot tighten them.⁷ A part-timer who has worked a few hours across three of the past five years and cleared $800 this year probably qualifies. Leaving that person out puts the plan’s tax-favored status at risk for every participant.

How Roth SEP Contributions Are Taxed and Reported

This is where the Roth version departs sharply from what most employers expect. A Roth-designated SEP contribution is not reported on Form W-2. It goes on Form 1099-R for the year it is allocated to the employee’s account, with the total in boxes 1 and 2a, code 2 or 7 in box 7, and the IRA/SEP/SIMPLE box checked.⁸

The contribution is also not subject to withholding for federal income tax, FICA, or FUTA.⁸ The full amount lands in the employee’s Roth account, and the employee owes the resulting income tax when they file. If you elect Roth treatment, plan for a bigger balance due at filing time, and consider adjusting estimated tax payments so you aren’t caught short.

The employee must be fully vested in any employer contribution designated as Roth at the moment it’s made. You can’t be taxed on money the employer could later reclaim.

Setting Up a Plan That Allows Roth Contributions

Every SEP needs a written plan document. The IRS model is Form 5305-SEP, which the employer completes with its name, the eligibility rules it’s using, and an allocation formula, then keeps on file. The form is not sent to the IRS.⁷

Here is the practical snag. The current Form 5305-SEP was last revised in 2004 and expressly states that SEP contributions may not be made to a Roth IRA.⁵ The IRS has not yet released a version that reflects SECURE 2.0. An employer that wants to offer the Roth option will generally need a prototype document from a financial institution rather than the IRS model form. Ask your plan provider whether they have a Roth-compatible SEP document available.

Once a Roth-capable plan is in place, each employee who wants Roth treatment makes a written election. The employer keeps those elections on file to support the Form 1099-R reporting.

Contribution Deadline

SEP contributions for a tax year must be deposited by the due date of the business’s income tax return, including any authorized extensions.² For a calendar-year business, that’s generally April 15, or October 15 with the automatic six-month extension.⁹ A brand-new SEP can even be established by that same deadline and count for the prior tax year.

Converting an Existing Traditional SEP Balance

The Roth election applies only to new contributions. Money already sitting in a traditional SEP IRA doesn’t move over on its own. You can convert it, though: take a distribution and roll it into a Roth IRA within 60 days, request a trustee-to-trustee transfer, or move it within the same institution.¹⁰

The full converted amount is taxable income in the year of conversion, because the original SEP dollars were never taxed. Report the conversion on Form 8606. Since 2018, conversions from a traditional IRA, SEP, or SIMPLE to a Roth IRA cannot be reversed by recharacterization.¹⁰ Once you convert, the tax hit is locked in. Converting a large balance in one year can push you into a higher bracket, so many people spread conversions over several years.

Required Minimum Distributions

Traditional SEP balances follow the standard RMD rules, with distributions required starting at age 73. Roth SEP contributions go into a Roth IRA, and Roth IRAs are not subject to required minimum distributions during the owner’s lifetime.¹¹ For anyone who doesn’t need the money early in retirement, that means more years of tax-free growth and a cleaner estate plan.

Beneficiaries who inherit either type of account still face their own RMD rules. The lifetime exemption belongs to the original Roth IRA owner alone.

1
Internal Revenue Service. SECURE 2.0 Act Impacts How Businesses Complete Forms W-2
2
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
3
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
4
Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
5
Internal Revenue Service. Form 5305-SEP – Simplified Employee Pension Individual Retirement Accounts Contribution Agreement
6
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
7
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
8
Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
9
U.S. Department of Labor. SEP Retirement Plans for Small Businesses
10
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs
11
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs