What Is a SEP IRA? A Complete Guide for Self-Employed Workers (2026)

A SEP IRA, or Simplified Employee Pension Individual Retirement Account, is a tax-advantaged retirement account designed for self-employed individuals and small business owners. It allows you to contribute significantly more than a traditional IRA, with less paperwork than a 401(k), and contributions are fully tax-deductible.

If you are a freelancer, independent contractor, or small business owner, a SEP IRA is one of the most powerful retirement savings tools available to you.

SEP IRA Contribution Limits for 2026

The SEP IRA contribution limit for 2026 is the lesser of:

25% of your net self-employment income (after deducting the self-employment tax deduction), or
$70,000 (the 2026 IRS limit)

Compare this to a traditional or Roth IRA, which caps contributions at $7,000 per year. For high earners, the SEP IRA allows you to shelter dramatically more money from taxes each year.

How Contributions Work

You make contributions as the employer, not the employee. This distinction matters for the calculation but does not change the tax benefit. Contributions are deductible on your Schedule C (for sole proprietors) or on your business tax return.

You have until your tax filing deadline, including extensions, to make contributions for the prior year. If your return is due April 15 and you file an extension to October 15, you have until October 15 to contribute for the prior tax year.

SEP IRA vs. Solo 401(k)

Both accounts are designed for self-employed individuals, but they have key differences:

Feature	SEP IRA	Solo 401(k)
2026 Max Contribution	$70,000 (25% of income)	$70,000 ($23,500 employee + 25% employer)
Roth Option	No	Yes (Roth Solo 401k)
Loans Allowed	No	Yes
Paperwork	Minimal	More (Form 5500 when assets exceed $250k)
Employees	Must cover eligible employees	Only for owner (and spouse)

For most solo operators with no employees, a Solo 401(k) is often better because you can contribute more at lower income levels (due to the employee contribution component). A SEP IRA shines for simplicity and when you have part-time employees to cover.

How a SEP IRA Is Taxed

SEP IRAs follow traditional IRA tax rules:

Contributions are tax-deductible in the year made
Investment gains grow tax-deferred
Withdrawals in retirement are taxed as ordinary income
Required Minimum Distributions (RMDs) begin at age 73
Early withdrawals before age 59½ are subject to a 10% penalty plus income tax

There is no Roth version of a SEP IRA. If you want tax-free retirement income, consider a Roth IRA alongside your SEP (if you are eligible) or a Solo 401(k) with a Roth component.

Who Can Open a SEP IRA?

Any self-employed individual or small business owner with self-employment income can open a SEP IRA. This includes:

Freelancers and independent contractors
Sole proprietors
Partners in a partnership
S-corp or C-corp owners with self-employment income

If you have employees, they must generally be covered if they are 21 or older, have worked for you in at least 3 of the last 5 years, and earned at least $750 in 2026. You must contribute the same percentage of compensation for eligible employees as you do for yourself.

How to Open a SEP IRA

The process is straightforward:

Choose a brokerage (Fidelity, Vanguard, Schwab, and TD Ameritrade all offer no-fee SEP IRAs)
Complete IRS Form 5305-SEP (one page, no filing required — keep it for your records)
Open the account and fund it
Invest in mutual funds, ETFs, or other eligible investments

There is no annual IRS filing requirement unless you have 100+ participants. For most solo operators, setup and administration are nearly effortless compared to a 401(k).

How Much Can You Actually Save?

At $100,000 in net self-employment income, you can contribute roughly $18,587 to a SEP IRA (25% of net income after the SE tax deduction). At $200,000 net income, that jumps to approximately $37,174. At $280,000 or more, you hit the $70,000 cap.

These pre-tax contributions reduce your taxable income dollar-for-dollar, providing substantial tax savings now while building your retirement fund.

The Bottom Line

A SEP IRA is one of the simplest and most powerful retirement tools available to self-employed workers. If you are earning self-employment income and not yet using one, you are likely overpaying in taxes and undersaving for retirement. Open one before your next tax deadline.