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).
Table of Contents
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)
