A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a retirement savings account designed for self-employed individuals and small business owners. It offers some of the highest contribution limits of any retirement account — up to $69,000 in 2024 — and is remarkably easy to set up and maintain.
How a SEP IRA Works
A SEP IRA works similarly to a traditional IRA, but with one critical difference: the contribution limits are dramatically higher. Instead of the $7,000 annual limit on a regular IRA, a SEP IRA allows you to contribute up to 25% of your net self-employment income, or $69,000 (2024 limit, adjusted annually for inflation) — whichever is less.
Contributions are made by the employer (which is you, if you’re self-employed). Contributions are tax-deductible, reducing your taxable income now. Funds grow tax-deferred until retirement, when withdrawals are taxed as ordinary income.
2026 SEP IRA Contribution Limits
The IRS adjusts contribution limits annually. For the most current limits, check IRS Publication 560. As a baseline: the limit is the lesser of 25% of compensation or $69,000 (2024). For the self-employed, the calculation is slightly different — you use a reduced rate of approximately 20% of net self-employment income after deducting half of self-employment tax.
Who Can Open a SEP IRA?
Any self-employed person, freelancer, sole proprietor, or small business owner can open a SEP IRA. This includes:
- Freelancers and independent contractors
- Sole proprietors
- Partners in a partnership
- S-corp or LLC owners who pay themselves
- Side hustle income earners (even with a full-time job)
You can contribute to a SEP IRA even if you also participate in an employer’s 401(k) plan. The contribution limits are separate.
SEP IRA vs. Solo 401(k)
Both are top choices for self-employed retirement savings. Key differences:
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Max contribution (approximate) | ~20% of net income | $23,000 employee + 25% employer (up to $69,000 total) |
| Setup complexity | Very simple | Moderate |
| Roth option | No | Yes (Roth Solo 401(k)) |
| Loan option | No | Yes |
| Employees allowed | Yes (must contribute for all) | No (owner + spouse only) |
If you have no employees and want to maximize contributions on a lower income, the Solo 401(k) often allows higher contributions because it includes an employee contribution component. At higher income levels, the limits converge.
SEP IRA Rules and Requirements
- Contribution deadline: You have until your tax filing deadline (including extensions) to make contributions for the prior year. This means you can open and fund a SEP IRA as late as October if you file an extension.
- Employees: If you have employees, you must contribute the same percentage of compensation for all eligible employees as you contribute for yourself. This makes SEP IRAs less attractive for businesses with multiple employees.
- Withdrawals: Early withdrawals before age 59½ trigger a 10% penalty plus ordinary income tax. Required minimum distributions (RMDs) begin at age 73.
- Investments: Once funded, you invest the money in whatever securities your brokerage offers — stocks, ETFs, mutual funds, bonds.
How to Open a SEP IRA
- Choose a brokerage: Fidelity, Vanguard, Charles Schwab, and TD Ameritrade all offer commission-free SEP IRAs with no account fees.
- Complete the IRS Form 5305-SEP (the model SEP agreement) — this is your plan document. You don’t file it with the IRS.
- Open the account online. Most brokerages let you do this in under 15 minutes.
- Fund the account. You can contribute a lump sum or in installments throughout the year.
Tax Benefits of a SEP IRA
Contributions to a SEP IRA reduce your adjusted gross income (AGI) dollar for dollar. If you’re self-employed and in the 22% tax bracket, contributing $20,000 to a SEP IRA saves you $4,400 in federal income taxes — plus state income taxes where applicable. This is one of the most powerful legal tax reduction tools available to self-employed people.
Bottom Line
A SEP IRA is one of the easiest, most powerful retirement savings tools available to self-employed individuals and small business owners. It takes 15 minutes to open, allows contributions up to $69,000 per year, and reduces your tax bill immediately. If you have any self-employment income and aren’t maxing out a SEP IRA, you’re leaving a significant tax advantage on the table.