SEP IRA Rules You Should Know

SEP IRA rules might not be the first thing that come to mind when you think about retirement—but if you’re a federal or postal employee with side income, they could make a big difference. While FERS and the Thrift Savings Plan (TSP) provide a strong base, they may not be enough to meet your long-term goals. That’s where SEP IRAs come in—especially if you have a small business, freelance work, or any self-employment income.

What Is a SEP IRA?

A SEP IRA is a type of retirement plan that allows employers to contribute to traditional IRAs set up for their employees. It’s designed with small business owners and self-employed individuals in mind. Even better—it’s simple to manage and offers generous contribution limits.

If you’re a federal or postal employee with a side hustle or self-employed income, the SEP IRA might be an option you’ve never considered—but should.

Key Features of SEP IRAs

Let’s go over the basics that make a SEP IRA worth considering:

• Employer Contributions Only: Only employers can contribute. As an employee, you don’t put in your own money.

• High Contribution Limits: For 2025, employers can contribute up to 25% of an employee’s compensation, or up to $70,000, whichever is less.

• Immediate Vesting: Once contributions are made, the funds belong to the employee right away.

• Flexible Contributions: Contributions don’t have to be made every year, which is helpful for businesses with fluctuating income.

Understanding SEP IRA rules like these can help you plan smarter—especially if you’re earning money on the side of your government job.

Can Federal and Postal Employees Use a SEP IRA?

This is a common question—and the answer is yes, but with conditions.

Federal and postal employees who have a side business or freelance work can qualify to open a SEP IRA for that extra income. This means if you deliver packages on weekends, do freelance consulting, sell products online, or own a small business, you may be eligible.

However, it’s very important to make sure your side business follows all federal ethics rules. Always check with your agency or HR office if you’re unsure.

Why a SEP IRA Might Work for You

If you’re earning income outside your government job, a SEP IRA could be the perfect way to build extra retirement savings—faster. Let’s look at a few reasons why:

• Higher Contribution Limits: SEP IRAs let you put away more than traditional IRAs, helping you save quicker.

• Tax Advantages: Contributions are tax-deductible and your money grows tax-deferred until you retire.

• Simple Setup: SEP IRAs have fewer rules and lower costs than other retirement plans.

Points to Consider Before Opening a SEP IRA

Before you jump in, there are a few things you should know:

• Equal Contribution Rule: If you have employees in your side business, you must contribute the same percentage to their SEP IRA as you do to your own.

• No Catch-Up Option: SEP IRAs don’t allow catch-up contributions for those over 50 like some other plans do.

• Early Withdrawal Penalties: If you withdraw funds before age 59½, you’ll pay regular income tax plus a 10% penalty.

Knowing these SEP IRA rules ahead of time can help you decide if it’s the right tool for your savings strategy.

How Does a SEP IRA Fit With FERS?

The great news is—you don’t have to choose between a SEP IRA and your federal benefits. You can have both, as long as the SEP IRA is connected to your side business.

Here’s how to make the most of all your options:

• Keep contributing to your Thrift Savings Plan (TSP) through your federal job.

• Add to your SEP IRA from any self-employed income.

• Consider speaking with a financial advisor to make sure your contributions follow the IRS annual limits.

How to Set Up a SEP IRA in 5 Easy Steps

Getting started is easier than you think. Here’s a simple breakdown:

1. Confirm Eligibility
   Make sure you’re earning self-employment income and that your business fits SEP IRA guidelines.

2. Pick a Financial Institution
   Choose a bank, brokerage firm, or financial company that offers SEP IRA plans.

3. Fill Out the Paperwork
   Use IRS Form 5305-SEP or the provider’s online form to create your plan.

4. Notify Any Employees
   If your side business has eligible workers, you’re required to inform them and contribute to their SEP IRAs too.

5. Make Contributions
   Once your plan is set up, you can begin making contributions—up to 25% of your net earnings, or $70,000 for 2025.

Final Thoughts: Why You Shouldn’t Overlook the SEP IRA

If you’re a federal or postal employee juggling work and a side business, the SEP IRA gives you a powerful way to save more—without the complexity. You already work hard. Why not make your money work just as hard for your future?

Don’t wait until retirement feels out of reach. With the right strategy, you can build a solid safety net—on top of FERS and TSP. And knowing the most important SEP IRA rules puts you in control.

Your Next Steps

If you’re ready to explore whether a SEP IRA is right for you, our team at The Benefit Coordinators is here to help. We specialize in helping federal and postal employees understand all their retirement options—clearly, simply, and with your best interest in mind.

Let’s take the guesswork out of retirement planning. Visit thebenefitcoordinators.com to book a free consultation.