A SEP IRA (Simplified Employee Pension) is a retirement account designed for self-employed individuals and small business owners. It allows much higher contributions than a traditional IRA while being simpler than a 401(k).
SEP IRA Contribution Limits (2026)
| Limit | 2026 | 2025 |
|---|---|---|
| Maximum contribution | $70,000 | $69,000 |
| Percentage of compensation cap | 25% | 25% |
| Maximum eligible compensation | $345,000 | $345,000 |
| Minimum age for participation | None | None |
| Contribution deadline | Tax filing deadline (+ extensions) | Tax filing deadline (+ extensions) |
How Much Can You Actually Contribute?
For employees, the calculation is straightforward: 25% of W-2 compensation up to $70,000.
For self-employed individuals, it’s slightly different:
| Net Self-Employment Income | Effective Rate | Max SEP Contribution |
|---|---|---|
| $50,000 | ~20% | $9,295 |
| $75,000 | ~20% | $13,942 |
| $100,000 | ~20% | $18,587 |
| $150,000 | ~20% | $27,885 |
| $200,000 | ~20% | $37,174 |
| $280,000+ | ~20% | $70,000 (max) |
| $345,000+ | — | $70,000 (cap) |
The effective rate for self-employed is lower because you must subtract half of self-employment tax first.
SEP IRA Rules
| Rule | Detail |
|---|---|
| Who can open | Any business owner or self-employed person |
| Employee eligibility | Age 21+, worked 3 of last 5 years, earned $750+ |
| Contribution source | Employer only (not employee) |
| Tax treatment | Contributions are tax-deductible; growth is tax-deferred |
| RMD age | 73 (starting 2023) |
| Early withdrawal penalty | 10% before age 59½ (plus income tax) |
| Roth option | No |
| Loans | No |
| Contribution deadline | Tax filing deadline including extensions |
| IRA aggregation | Yes, counts with other traditional IRAs for Roth conversion |
SEP IRA vs. Solo 401(k) vs. SIMPLE IRA
| Feature | SEP IRA | Solo 401(k) | SIMPLE IRA |
|---|---|---|---|
| Max contribution (2026) | $70,000 | $70,000 + $23,500 employee = $93,500 | $16,500 + 3% match |
| Employee contributions | No | Yes ($23,500) | Yes ($16,500) |
| Employer contributions | Up to 25% of comp | Up to 25% of comp | Required 2-3% match |
| Roth option | No | Yes | No |
| Catch-up (50+) | No | $7,500 | $3,500 |
| Super catch-up (60-63) | No | $11,250 | $5,250 |
| Loan provision | No | Yes (up to $50K) | No |
| Employees allowed | Yes (must contribute for all) | No (solo or spouse only) | Yes |
| Setup complexity | Very easy | Moderate | Easy |
| Annual filing (Form 5500) | No | Yes (if >$250K) | No |
| Allows Roth conversions | Via rollover to Roth IRA | In-plan Roth conversion | Via rollover |
| Backdoor Roth IRA friendly | No (pro-rata rule) | Yes | No (pro-rata rule) |
When Each Account Wins
| Scenario | Best Choice | Why |
|---|---|---|
| Self-employed, no employees, want max savings | Solo 401(k) | Higher effective limits, Roth option, loans |
| Self-employed with employees | SEP IRA or SIMPLE IRA | Solo 401(k) doesn’t allow employees |
| Want simplest setup possible | SEP IRA | Open at any brokerage in minutes |
| Income over $280K, self-employed | SEP IRA or Solo 401(k) | Both hit $70K employer max |
| Want to do Backdoor Roth IRA too | Solo 401(k) | SEP IRA triggers pro-rata rule |
How to Open a SEP IRA
- Choose a brokerage (Fidelity, Schwab, Vanguard — all free)
- Complete IRS Form 5305-SEP (most brokerages do this for you)
- Fund the account before your tax filing deadline
- Invest the contributions (don’t leave cash sitting idle)
- Report on your tax return (Schedule C deduction for self-employed)
SEP IRA Tax Benefits
| Benefit | Detail |
|---|---|
| Contribution deduction | Above-the-line deduction (reduces AGI) |
| Self-employed tax deduction | Separate from the 50% SE tax deduction |
| Tax-deferred growth | No taxes on gains until withdrawal |
| State tax deduction | Most states allow (check yours) |
| Pass-through deduction (QBI) | SEP contributions reduce QBI for 20% deduction |
Example Tax Savings
| Income | SEP Contribution | Tax Bracket | Federal Tax Savings | State Tax Savings (est.) |
|---|---|---|---|---|
| $100,000 | $18,587 | 22% | $4,089 | $930 |
| $150,000 | $27,885 | 24% | $6,692 | $1,394 |
| $200,000 | $37,174 | 32% | $11,896 | $1,859 |
SEP IRA Mistakes to Avoid
- Not contributing for eligible employees: If you have employees who meet the criteria, you MUST contribute the same percentage for them
- Missing the contribution deadline: Must contribute by tax filing deadline (including extensions — file an extension if needed)
- Leaving contributions in cash: Invest immediately; cash drag hurts long-term returns
- Ignoring the Solo 401(k): Often a better option if you’re truly solo
- Forgetting the pro-rata rule: SEP IRA balance affects Backdoor Roth IRA conversions
Related: 401(k) Contribution Limits | Roth IRA vs Traditional IRA | Self-Employment Tax | How Much Do You Need to Retire?