A SEP IRA — Simplified Employee Pension Individual Retirement Account — is one of the most powerful retirement savings tools available to self-employed individuals and small business owners. It allows for dramatically higher contribution limits than a traditional IRA, has minimal administrative overhead, and comes with a significant tax deduction. If you earn self-employment income and are not maxing out a tax-advantaged retirement account, a SEP IRA deserves a serious look.
What Is a SEP IRA?
A SEP IRA is an employer-sponsored retirement plan that allows employers — including self-employed individuals who are their own employer — to make tax-deductible contributions to retirement accounts for themselves and their employees. For a solo self-employed person, the SEP IRA functions essentially as a supercharged traditional IRA with much higher contribution limits.
The “employer” contribution model is what makes the SEP IRA different from a regular IRA. As a self-employed person, you wear two hats: you are both the employee and the employer. The employer contributions you make to your SEP IRA are deductible from your business income (on Schedule C or through your S-corp), reducing your taxable income for the year.
SEP IRA Contribution Limits for 2026
For 2026, you can contribute up to the lesser of:
- 25% of your net self-employment income (after the self-employment tax deduction), OR
- $69,000
For a self-employed individual, net self-employment income for SEP purposes is calculated as net profit from Schedule C, reduced by the deductible portion of self-employment tax. The effective contribution rate works out to approximately 20% of net profit from Schedule C (not 25%), due to this adjustment.
Example: A freelancer with $150,000 in net self-employment income can contribute approximately $28,000 to their SEP IRA. A consultant with $250,000 in net self-employment income can contribute approximately $49,600 — approaching the $69,000 maximum. Someone earning $290,000 or more can hit the $69,000 cap.
Compare this to the regular IRA limit of $7,000 ($8,000 if you are 50 or older) in 2026. A SEP IRA allows nearly 10 times more in contributions.
Tax Benefits of a SEP IRA
Contributions to a SEP IRA are tax-deductible in the year they are made. This reduces your adjusted gross income and, therefore, your income tax liability. For someone in the 24% tax bracket, a $30,000 SEP IRA contribution saves $7,200 in federal income tax (plus state income tax savings if applicable).
The money inside a SEP IRA grows tax-deferred. You pay no taxes on dividends, interest, or capital gains while the money is in the account. Taxes are owed when you take distributions in retirement, at which point you will likely be in a lower tax bracket.
Unlike some retirement plans, SEP IRA contributions do not reduce self-employment tax. They reduce income tax only. Still, the income tax savings are substantial.
SEP IRA Rules and Eligibility
Who Can Open a SEP IRA?
Any self-employed person with earned self-employment income can open and contribute to a SEP IRA. This includes sole proprietors, freelancers, independent contractors, partners in a partnership, and S-corporation shareholders who receive compensation from the corporation. You can be your only employee, and you can contribute the same year you start your business.
Employees and SEP IRAs
If you have employees, you must contribute the same percentage of compensation to their SEP IRAs as you do to your own. This is the major trade-off: a sole proprietor with no employees has complete flexibility, but adding employees significantly increases the cost of a SEP IRA. This is why business owners with employees often prefer SIMPLE IRAs or 401(k) plans, where the matching structure is different.
An employee is eligible to participate in your SEP IRA if they have:
- Worked for you in at least three of the last five years
- Earned at least $750 in compensation from you in 2026
- Are at least 21 years old
Contribution Deadline
You have until your tax filing deadline — including extensions — to make a SEP IRA contribution for the prior tax year. For a sole proprietor filing Schedule C, you have until October 15, 2026 (with an extension) to make a 2025 SEP IRA contribution. This is a major advantage over many other retirement plans, which have earlier deadlines.
Withdrawals and Distributions
SEP IRA distributions follow the same rules as traditional IRA distributions. You can take distributions without penalty starting at age 59½. Required minimum distributions (RMDs) begin at age 73. Early withdrawals before 59½ are subject to a 10% penalty plus ordinary income tax, with the same exceptions as traditional IRAs (first home purchase, disability, substantially equal periodic payments, etc.).
How to Open a SEP IRA in 2026
Opening a SEP IRA is straightforward and takes about 15-30 minutes at most major brokerage firms.
Step 1: Choose a Provider
Most major brokerages offer SEP IRAs with no account fees and no minimum balance requirements:
- Fidelity: No minimums, excellent fund selection, strong tools for the self-employed
- Charles Schwab: No minimums, wide fund selection including Schwab index funds with zero expense ratios
- Vanguard: Known for low-cost index funds, strong long-term reputation
- TD Ameritrade (now part of Schwab): Good tools and fund selection
- Betterment: Robo-advisor option if you prefer automated investing
Step 2: Complete the Form 5305-SEP
When you open a SEP IRA, the institution will have you complete IRS Form 5305-SEP (or an equivalent prototype document). This is the plan agreement that establishes your SEP IRA. You do not file Form 5305-SEP with the IRS — it is kept in your records. The brokerage handles this step as part of the account opening process.
Step 3: Fund the Account
You can fund your SEP IRA with a bank transfer, a check, or a rollover from another retirement account. The institution applies your contribution to the year you specify (the current year or the prior tax year if you are within the filing deadline).
Step 4: Invest
Your SEP IRA funds can be invested in virtually anything a traditional IRA allows: stocks, bonds, mutual funds, index funds, ETFs, REITs, and more. Most self-employed individuals use low-cost index funds for simplicity and long-term growth.
SEP IRA vs. Solo 401(k): Which Is Better?
For self-employed individuals with no employees, the Solo 401(k) (also called an Individual 401k) often allows for higher contributions at lower income levels because it allows both employee contributions ($23,500 in 2026, plus $7,500 catch-up if 50+) and employer contributions (up to 25% of net self-employment income), up to the combined $69,000 limit.
The SEP IRA wins on simplicity — no annual filings required (unlike 401(k) plans above $250,000 in assets, which require Form 5500), easier to open, and more provider options. For most self-employed people earning under $150,000, the contribution limits are similar, so the SEP IRA’s simplicity wins.
Common SEP IRA Questions
Can I have a SEP IRA and a traditional IRA? Yes. SEP IRA contributions do not count toward your traditional IRA contribution limit. However, if you or your spouse have access to a workplace retirement plan, your traditional IRA deduction may be limited based on income.
Can I have a SEP IRA and contribute to an employer 401(k) from a day job? Yes, contributions to each are separate. You can max out your employer 401(k) at work and still make SEP IRA contributions from self-employment income.
Do I need to contribute every year? No. A SEP IRA has no mandatory contribution requirement. You can contribute in profitable years and skip contributions in lean years.
Key Takeaways
- A SEP IRA allows self-employed individuals to contribute up to $69,000 per year (2026) or 25% of net self-employment income, whichever is less.
- Contributions are fully tax-deductible and reduce your income tax.
- There are no annual filing requirements and opening the account is simple.
- You have until your tax filing deadline (including extensions) to make contributions for the prior year.
- If you have employees, you must contribute the same percentage to their accounts.