A SEP IRA lets self-employed people and small business owners set aside money for retirement with higher contribution limits than a regular IRA
A SEP IRA (Simplified Employee Pension) is a retirement account designed for self-employed workers and business owners. You contribute pre-tax money, it grows tax-deferred, and you pay income tax only when you withdraw it in retirement. The main advantage is that you can contribute much more per year than you can into a traditional or Roth IRA — up to 25% of your net self-employment income, with a maximum that changes yearly (in 2024 it was $69,000, but this figure adjusts annually).
If you have employees, you must contribute the same percentage of income to their SEP IRAs as you contribute to your own. This requirement is why many solo self-employed people choose a SEP over other options — they have no employees to fund. A SEP IRA is straightforward to set up, requires minimal paperwork each year, and you can open one as late as your tax filing important date (including extensions).
Key Takeaways
- You can contribute up to 25% of your net self-employment income to a SEP IRA each year, with a maximum amount that the IRS adjusts annually.
- If you have employees, you must contribute the same percentage to their accounts as you contribute to your own, which can make a SEP expensive if you have staff.
- Money in a SEP IRA grows tax-deferred, and you pay income tax on withdrawals in retirement, not when you contribute.
- You can open a SEP IRA and make contributions for a tax year up until your tax filing important date, including any extensions you request.
- A SEP IRA is simpler to maintain than a solo 401(k) or a defined benefit plan, with no annual IRS filings required for most situations.
How much you can contribute each year
Your contribution limit is based on your net self-employment income — the profit from your business after you subtract business expenses and half of your self-employment tax. The IRS lets you contribute up to 25% of that income. If you earn $50,000 in net self-employment income, you could contribute up to $12,500. If you earn $100,000, you could contribute up to $25,000.
There is also a ceiling on total contributions. For 2024, the maximum was $69,000 per person per year. This limit increases most years to keep pace with inflation, so check the current year's limit before you plan your contribution. The IRS publishes the updated limit in November for the following year.
You do not have to contribute the same amount every year. In a year when business is slow, you can contribute less or nothing at all. In a strong year, you can max out your limit. This flexibility is one reason self-employed people prefer a SEP to a solo 401(k), which requires you to make contributions if you take a salary.
The employee contribution requirement
If you have even one employee who has worked for you for at least three of the past five years and earned at least $750 in the current year, you must include them in your SEP IRA. You must contribute the same percentage of compensation to their account as you contribute to your own. If you contribute 15% of your income, you contribute 15% of each employee's wages.
This rule is why a SEP IRA works best for solo self-employed people. If you have a $50,000 payroll and you want to contribute 20% of your income to your own account, you also owe 20% of that $50,000 — $10,000 — to your employees' accounts. For some business owners, this cost makes a SEP impractical, and they choose a solo 401(k) instead, which lets them contribute to their own account without funding employees.
Employees do not make contributions themselves. The contributions are entirely from the business owner. The money goes into accounts held in the employees' names, and they own it when ready — there is no vesting period.
How to open and fund a SEP IRA
You open a SEP IRA through a bank, brokerage, or investment firm — the same places that offer regular IRAs. Common providers include Vanguard, Fidelity, Charles Schwab, and most local banks. There is no federal registration or IRS approval process. You fill out a form (usually called a SEP IRA adoption agreement), sign it, and the account is active.
You can open a SEP IRA and make contributions for a given tax year until your tax filing important date. If you file on April 15, you can open the account and contribute through April 15. If you request an extension, you can contribute until the extended important date (usually October 15). This important date flexibility is useful if you do not know your final income until late in the tax season.
You fund the account by transferring money from your business bank account or personal account. You do not send money to the IRS. The contribution is deducted on your tax return (Schedule C for self-employed people, or Schedule 1 if you have other income). You claim the deduction when you file your return, not when you make the contribution.
SEP IRA vs. solo 401(k) vs. regular IRA
| Feature | SEP IRA | Solo 401(k) | Regular IRA |
|---|---|---|---|
| Maximum contribution (2024) | $69,000 or 25% of income | $69,000 or 25% of income | $7,000 |
| Can contribute if you have employees | Yes, but must fund them equally | Yes, but more complex | No |
| Annual IRS filing required | No (usually) | Yes, Form 5500 if over $250,000 | No |
| Setup complexity | straightforward | Moderate | straightforward |
| Best for | Solo self-employed, high income | Solo self-employed with employees | W-2 employees, low income |
A regular IRA (traditional or Roth) has a much lower contribution limit — $7,000 per year in 2024 — and is designed for W-2 employees, not self-employed people. If you are self-employed and earn enough to save more than $7,000 per year, a SEP or solo 401(k) makes more sense.
A solo 401(k) (also called a self-employed 401(k)) lets you contribute the same total amount as a SEP, but the rules are more flexible if you have employees. With a solo 401(k), you can contribute to your own account without funding employees at the same rate — you only fund them on salary deferrals, not on employer contributions. However, a solo 401(k) requires more paperwork, costs more to set up, and may require an annual IRS filing if the account balance exceeds $250,000. Most solo self-employed people choose a SEP because it is simpler.
Tax treatment and withdrawals
Money you contribute to a SEP IRA reduces your taxable income for the year you contribute. If you contribute $20,000, your taxable income drops by $20,000. You do not pay income tax on the contribution or on the investment growth inside the account.
When you withdraw money in retirement, you pay ordinary income tax on the full amount — both your contributions and the growth. If you withdraw $50,000 in a year when you are in the 22% tax bracket, you owe roughly $11,000 in federal income tax on that withdrawal (plus any state income tax, depending on where you live).
You must begin taking withdrawals at age 73 (as of 2023; this age has been rising gradually under recent law changes). The IRS calculates a minimum withdrawal amount based on your age and account balance. If you do not take the required amount, you owe a penalty of 25% of the shortfall (reduced to 10% if you correct it within two years).
You can withdraw money before age 59½, but you will owe a 10% early withdrawal penalty plus income tax on the amount withdrawn. There are a few exceptions — for example, if you are disabled or facing a financial hardship — but they are narrow and require IRS approval.
When a SEP IRA makes sense and when it does not
A SEP IRA is the right choice if you are self-employed, have no employees (or only employees you do not want to fund), and want to save more than $7,000 per year for retirement. It is especially useful if your income fluctuates — you can contribute more in good years and less in slow years.
A SEP IRA is not the right choice if you have employees you want to keep but cannot afford to fund at the same rate you fund yourself. In that case, a solo 401(k) or a straightforward IRA (a different plan designed for small employers) may work better. A SEP is also not ideal if you want to borrow from your retirement account — SEP IRAs do not allow loans, but solo 401(k)s do.
If you earn very little (under $5,000 per year in self-employment income), a regular IRA may be sufficient and simpler to manage. The trade-off is that you can only contribute $7,000 per year instead of 25% of your income.
Frequently Asked Questions
Can I have both a SEP IRA and a regular IRA?
Yes, but your total contributions across all IRAs (SEP, traditional, and Roth) cannot exceed the annual limit for regular IRAs ($7,000 in 2024) plus your SEP contribution. In practice, most people max out the SEP and do not contribute to a regular IRA in the same year. You can roll a regular IRA into a SEP, but the rules are complex — speak with a tax professional before doing this.
What happens to my SEP IRA if I sell my business?
The account remains yours and continues to grow tax-deferred. You cannot make new contributions once you stop being self-employed (unless you have other self-employment income), but the money already in the account stays invested. You can roll it into another IRA or leave it where it is.
Do I need a separate SEP IRA for each business I own?
No. You can have one SEP IRA and contribute to it from multiple self-employment income sources. However, your contribution limit is based on your total net self-employment income across all businesses, not per business. If you have two side businesses earning $30,000 each, your limit is 25% of $60,000, not 25% of each $30,000 separately.
Can I change my SEP IRA contribution after I file my tax return?
If you filed your return without making a SEP contribution, you can still make one if you file an amended return (Form 1040-X) before the original important date plus extensions. If you already made a contribution and want to change it, you generally cannot — the contribution is locked in. However, if you made a mistake, you may be able to request IRS relief; consult a tax professional.
What if my business has a loss in a given year?
If your net self-employment income is negative (a loss), you cannot contribute to a SEP IRA that year. Your contribution is based on profit, not on how much money you have available. You can contribute in years when you are profitable and skip years when you lose money.