SEP IRA (Simplified Employee Pension)

A SEP IRA is a retirement plan that allows self-employed individuals and small business owners to make tax-deductible contributions of up to 25% of net self-employment income (up to $70,000 for 2025). SEP IRAs are simple to set up and maintain, with no annual filing requirements, making them a popular choice for solo business owners and freelancers.

A Simplified Employee Pension IRA (SEP IRA) is a retirement savings plan designed for self-employed individuals and small business owners. It allows the employer (which can be the self-employed individual) to make tax-deductible contributions to a traditional IRA established for each eligible employee, including themselves.

For 2025, the maximum contribution to a SEP IRA is the lesser of 25% of compensation (or approximately 20% of net self-employment income after the self-employment tax deduction) or $70,000. This high contribution ceiling makes the SEP IRA attractive for higher-earning self-employed individuals who want to shelter significant income from current taxation.

The SEP IRA is one of the simplest retirement plans to establish and maintain. There is no annual IRS filing requirement (unlike a Solo 401(k), which requires Form 5500-EZ when assets exceed $250,000), and contributions can be made up until the tax filing deadline, including extensions. This flexibility allows business owners to decide their contribution amount after they know their final income for the year.

However, the SEP IRA has some limitations worth understanding. All contributions are made by the employer (you cannot make employee salary deferrals like you can with a 401(k)). Contributions must be made as a uniform percentage of compensation for all eligible employees, which can become expensive for businesses with staff. There is no Roth option for SEP IRA contributions, meaning all contributions are pre-tax and withdrawals will be taxed as ordinary income.

For self-employed individuals without employees, the SEP IRA and the Solo 401(k) are the two most common retirement plan options. The Solo 401(k) may allow higher total contributions at lower income levels (because it includes both employee and employer contribution components) and offers a Roth option. However, the SEP IRA wins on simplicity and may be the better choice for those who value ease of administration or who are just getting started with business retirement planning.

SEP IRA balances are included in the pro-rata calculation for backdoor Roth conversions, which is an important consideration for higher-income individuals who use both strategies. Rolling a SEP IRA into a Solo 401(k) may help resolve this issue.

Why This Matters

A SEP IRA could allow self-employed individuals to make substantial tax-deductible retirement contributions with minimal administrative burden. Understanding how it compares to other options like the Solo 401(k) may help you choose the plan that maximizes your retirement savings while fitting your business situation.

Have questions about SEP IRA (Simplified Employee Pension)?

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