A SEP account is a retirement savings account designed for self-employed people and small business owners

SEP stands for Simplified Employee Pension. It is a retirement account that lets you set aside money for retirement with significant tax advantages. Unlike a regular savings account, contributions to a SEP reduce your taxable income for the year you make them, and the money grows tax-free until you withdraw it in retirement.

The core mechanic is straightforward: you contribute a portion of your business income to the account, you do not pay income tax on that contribution in the current year, and you do not pay tax on any investment gains until you take money out. The account itself holds investments—stocks, bonds, mutual funds—that you choose or that a financial institution manages for you.

SEPs are most common among freelancers, contractors, and owners of small businesses with no employees (or only a few). They are simpler to set up and maintain than a solo 401(k) or a traditional pension, which is why the IRS calls them "simplified."

Key Takeaways

  • A SEP account lets self-employed people and small business owners contribute a percentage of business income to retirement savings and deduct that contribution from taxable income.
  • You can contribute up to 25% of your net self-employment income, with an annual cap that changes each year (for 2024, the cap is $69,000).
  • SEP accounts are funded by the business owner only—if you have employees, you must contribute the same percentage of income for each of them that you contribute for yourself.
  • Money in a SEP grows tax-free, but you pay income tax on withdrawals after age 59½, and you must begin withdrawals at age 73.
  • You can open and fund a SEP up until your tax filing important date, including extensions, making it useful for people who decide late in the year to save for retirement.

How much you can contribute each year

The amount you can put into a SEP depends on your net self-employment income—the profit from your business after expenses. The IRS lets you contribute up to 25% of that income, but there is an annual ceiling. For 2024, the maximum contribution is $69,000 per person. That ceiling rises slightly most years to account for inflation.

The math works like this: if you are a freelancer with $100,000 in net income, you can contribute up to $25,000 to your SEP. If you have $40,000 in net income, you can contribute up to $10,000. The IRS publishes the exact percentage and ceiling each January, so check the current year's limits before you decide how much to set aside.

One important constraint: if you have employees, the percentage you contribute for yourself must match the percentage you contribute for them. If you put 20% of your income into your SEP, you must put 20% of each employee's salary into their SEP as well. This rule is why many small business owners with employees choose a solo 401(k) instead—it allows owner contributions that do not explore to staff.

The difference between a SEP and other retirement accounts

A SEP is not the same as a traditional IRA, even though both reduce your current-year taxes. A traditional IRA has a much lower contribution limit—for 2024, you can contribute $7,000 if you are under 50, or $8,000 if you are 50 or older. A SEP lets you put away far more money. If you have significant self-employment income, a SEP is usually the better choice.

A solo 401(k) is another option for self-employed people with no employees. It allows higher total contributions than a SEP in some cases and gives you the option to borrow against your balance. But a solo 401(k) requires more paperwork to set up and maintain. A SEP is simpler: you fill out a one-page form, give it to your financial institution, and you are done.

A SEP is also different from a Roth IRA, where contributions do not reduce your current taxes but withdrawals in retirement are tax-free. Roth accounts have much lower contribution limits and income restrictions. For most self-employed people with moderate to high income, a SEP or solo 401(k) makes more sense than a Roth.

How to open a SEP account

Opening a SEP is one of the simplest parts of retirement planning. You do not need to file paperwork with the IRS or your state. Instead, you go to a bank, brokerage, or investment company—Vanguard, Fidelity, Charles Schwab, and most other major financial institutions offer SEPs—and ask to open one. They provide the form (called a SEP-IRA agreement), you sign it, and the account is active.

You can open and fund a SEP as late as your tax filing important date for that year, including extensions. If you file your 2024 taxes in October 2025 (using an extension), you can still open and fund a 2024 SEP by that October important date. This flexibility is useful if you do not know your final income until late in the tax year.

There is no annual filing requirement with the IRS. You do not file Form 5500 or any other government document. You straightforward keep records of your contributions and report the deduction on your tax return (usually Schedule C if you are self-employed). Your financial institution sends you a statement each year showing the balance and any investment gains or losses.

Withdrawals and required minimum distributions

You can withdraw money from your SEP anytime, but there are tax consequences if you withdraw before age 59½. The withdrawal counts as income, so you pay ordinary income tax on it. If you withdraw before 59½, you also owe a 10% early withdrawal penalty on top of the income tax. There are narrow exceptions—hardship withdrawals, disability, or a few other situations—but they are uncommon and require documentation.

Once you reach age 59½, you can withdraw without the penalty, though you still pay income tax on the amount withdrawn. You can take out as much or as little as you want each year, and there is no requirement to withdraw anything at all while you are still working.

At age 73, the IRS requires you to begin taking withdrawals—called required minimum distributions, or RMDs. The amount is calculated based on your age and account balance, and you must withdraw at least that amount each year or face a penalty. If you are still working and do not need the money, you may be able to delay RMDs if your plan document allows it, but this depends on the specific rules of your SEP agreement.

What happens to a SEP if you have employees

If you hire employees, the rules change. You must offer each employee a SEP on the same terms you offer yourself. That means if you contribute 20% of your income, you must contribute 20% of each employee's salary to their SEP. You cannot pick and choose which employees get a SEP—the rule applies to all employees who have worked for you for at least three of the past five years and earned at least $750 in the current year.

This requirement is why many business owners with staff move to a solo 401(k) before hiring, or switch to a different retirement plan structure once they do hire. A solo 401(k) lets you make much larger contributions for yourself without triggering matching contributions for employees. If you are planning to grow your business and hire people, think about the retirement plan structure early.

If you already have a SEP and hire an employee, you do not have to close the account. You straightforward begin making matching contributions for that employee going forward. The employee's SEP is a separate account in their name, funded by you.

SEP accounts and taxes

The tax benefit of a SEP is the reason most people open one. Your contribution reduces your self-employment income for tax purposes, which lowers both your income tax and your self-employment tax (the Social Security and Medicare tax that self-employed people pay). If you contribute $25,000 to a SEP and your business income is $100,000, your taxable income drops to $75,000.

The investment gains inside the account—dividends, interest, capital gains—are not taxed while the money is in the account. This tax-free growth compounds over decades. When you withdraw money in retirement, you pay income tax on the entire amount withdrawn, including all the gains.

If you have both a SEP and a traditional IRA, your contributions to the traditional IRA may not be tax-deductible, depending on your income. The IRS limits how much you can deduct across all retirement accounts combined. Talk to a tax professional if you have both types of accounts.

Frequently Asked Questions

Can I open a SEP if I have a W-2 job and freelance on the side?

Yes. You can open a SEP based on your freelance income alone, even if you have a regular job. The contribution limit is based only on the self-employment income from the freelance work, not your W-2 salary. You can also have a 401(k) through your employer and a SEP at the same time.

What happens to my SEP if I stop working or sell my business?

The account stays open and the money remains yours. You do not have to close it or withdraw it. You can leave it invested and let it grow until you reach retirement age. If you sell your business, the SEP does not transfer to the buyer—it stays in your name and you control it.

Can I change my contribution amount each year?

Yes. You decide each year how much to contribute, up to the legal limit. One year you might contribute 25% of your income; the next year you might contribute 10% if business is slower. There is no minimum contribution, and you do not have to contribute every year. This flexibility is one reason SEPs are popular with self-employed people whose income varies.

What if I contribute too much to my SEP by mistake?

You can withdraw the excess contribution and any earnings on it before your tax filing important date (including extensions). The excess contribution itself is not taxed, but the earnings are taxed as income. After the important date, excess contributions are subject to a 6% penalty each year they remain in the account, so it is important to fix the mistake quickly.

Do I need a business license or formal business structure to open a SEP?

No. You can open a SEP as a sole proprietor with no formal business entity. You do not need an LLC, S-corp, or partnership. If you have self-employment income—from freelancing, consulting, or any other work—you can open a SEP. You will need a Social Security number or EIN, but not a business license.