If you’re self-employed, a freelancer, or a small business owner, a SEP IRA lets you save far more for retirement than a standard IRA — and contributions are fully tax-deductible. In 2026, the contribution limit is high enough that a SEP IRA can become one of the most powerful tax-reduction tools available to you.
What Is a SEP IRA?
SEP stands for Simplified Employee Pension. A SEP IRA is a retirement account designed for self-employed individuals and small business owners. It functions like a traditional IRA — contributions are pre-tax, the money grows tax-deferred, and you pay ordinary income tax when you withdraw in retirement.
The key advantage over a regular IRA is the contribution limit. While a traditional or Roth IRA caps contributions at $7,000 per year ($8,000 if you’re 50+), a SEP IRA allows contributions up to 25% of net self-employment income, with a 2026 dollar cap of $69,000.
Who Can Open a SEP IRA?
- Sole proprietors and freelancers
- Independent contractors (1099 workers)
- Small business owners — including those with employees (though employer contributions must be made proportionally for eligible employees)
- Partners in a partnership
If you have a side hustle on top of a W-2 job, you can open a SEP IRA for your self-employment income and still contribute to your employer’s 401(k). The two plans are separate.
How Much Can You Contribute to a SEP IRA in 2026?
Contributions are limited to the lesser of:
- 25% of net self-employment income (after deducting half of self-employment tax)
- $69,000 (the 2026 IRS dollar limit)
Example: If your net self-employment income is $120,000, you can contribute up to $30,000 (25% of $120,000). If your income is $300,000, you’d hit the $69,000 cap before reaching 25%.
Unlike a 401(k), there are no catch-up contributions for people over 50 in a SEP IRA.
SEP IRA Tax Advantages
Every dollar you contribute to a SEP IRA reduces your taxable income dollar-for-dollar. For a self-employed person in the 24% federal tax bracket who contributes $30,000, that’s $7,200 in federal tax savings — plus state income tax savings in most states.
You can make SEP IRA contributions up to the tax filing deadline (plus extensions). That means if you file an extension to October 15, you have until then to fund your SEP IRA for the prior year — giving you flexibility most other plans don’t offer.
SEP IRA vs. Solo 401(k)
For many self-employed individuals, the choice comes down to SEP IRA vs. Solo 401(k). Key differences:
- Solo 401(k) allows higher contributions at lower income levels because you can contribute as both employee (up to $23,000) and employer (25% of compensation). At income below $100,000, the Solo 401(k) typically wins.
- SEP IRA is simpler to open and maintain — no plan documents required, no annual filing for accounts under $250,000.
- Solo 401(k) allows Roth contributions (in most plans); SEP IRA does not — all contributions are pre-tax.
- SEP IRA allows employees; Solo 401(k) is for business owners with no full-time employees (other than a spouse).
How to Open a SEP IRA
Opening a SEP IRA is straightforward:
- Choose a provider — Fidelity, Vanguard, Schwab, and most major brokerages offer SEP IRAs with no account fees.
- Complete a one-page IRS Form 5305-SEP (this is the plan document; no IRS filing required).
- Make your contribution before your tax filing deadline.
- Invest the funds — typically in index funds for long-term growth.
SEP IRA Withdrawal Rules
SEP IRA follows the same rules as a traditional IRA. Withdrawals before age 59½ are subject to a 10% penalty plus ordinary income tax. Required Minimum Distributions (RMDs) begin at age 73 under current law. Early withdrawals for certain hardships may qualify for exceptions.
Related: What Is a SIMPLE IRA? 2026 Guide for Small Business Employees