What Is a SEP IRA?
In plain English
A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a retirement plan designed for self-employed individuals and small business owners. Employers — including sole proprietors — can contribute up to 25% of compensation or $70,000 for 2026, whichever is less. Contributions are tax-deductible and grow tax-deferred.
Who Is Eligible for a SEP IRA?
Any self-employed person, freelancer, or small business owner can open a SEP IRA. If you have employees, you must also contribute the same percentage of compensation for all eligible employees (those 21+, worked for you 3 of the past 5 years, and earned at least $750). This requirement makes SEP IRAs most attractive for sole proprietors or businesses with no or few employees.
How Do SEP IRA Contributions Work?
As the employer, you make all contributions to SEP IRAs — employees cannot make their own contributions. Self-employed individuals calculate their contribution limit as 20% of net self-employment income (after deducting half of self-employment taxes). The contribution deadline is your tax filing deadline including extensions, giving you considerable flexibility in planning. Contributions immediately vest to all participants.
How Does a SEP IRA Compare to a Solo 401(k)?
A SEP IRA offers simplicity and high contribution limits but lacks a Roth option and catch-up contributions. A Solo 401(k) allows both employee and employer contributions, providing higher limits at lower income levels, Roth options, and a loan provision. For self-employed individuals with higher income and maxed-out capacity, the SEP IRA's higher cap can be an advantage. Compare both options with your accountant annually.
Frequently asked questions
Can I have a SEP IRA and a traditional IRA at the same time?
Yes, you can contribute to both a SEP IRA and a traditional or Roth IRA in the same year. However, because you participate in an employer plan (your SEP IRA), your traditional IRA contributions may not be deductible depending on your income.
Are SEP IRA withdrawals taxed the same as a traditional IRA?
Yes. SEP IRA withdrawals in retirement are taxed as ordinary income. Early withdrawals before age 59½ are subject to the standard 10% penalty plus income taxes, with the same exceptions that apply to traditional IRAs. RMDs also begin at age 73.
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Related terms
SIMPLE IRA
A SIMPLE IRA is a low-cost, easy-to-administer retirement plan designed for small businesses with 100 or fewer employees that includes required employer contributions.
Traditional IRA
A traditional IRA lets you contribute pre-tax dollars that grow tax-deferred, with withdrawals taxed as ordinary income in retirement.
Rollover IRA
A rollover IRA receives funds transferred from an employer-sponsored retirement plan like a 401(k), preserving tax-deferred status while giving you control over investment choices.
Catch-Up Contributions
Catch-up contributions allow workers aged 50 and older to contribute extra money to retirement accounts beyond standard annual limits, helping them accelerate savings before retirement.
Defined-Contribution Plan
A defined-contribution plan specifies how much employers and employees can contribute to a retirement account, but the ultimate benefit depends on investment performance.
Profit Sharing
Profit sharing is a type of employer retirement contribution that allocates a portion of company profits to employee retirement accounts, often in addition to regular matching contributions.