An 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 your own retirement, and it works differently than the 401(k) plans you might see at larger employers. The main difference: you set up and manage it yourself, and the contribution limits are much higher than a regular IRA.

If you are self-employed, a freelancer, or own a small business, an SEP account lets you put away a percentage of your business income each year. You choose how much to contribute — there is no required minimum — and you get a tax deduction for the money you put in. The money grows tax-free until you withdraw it in retirement.

The account is "simplified" because it requires far less paperwork than a solo 401(k) or a traditional pension plan. You do not need to file complex forms with the IRS every year, and you can open one in less than an hour at most banks or investment firms.

Key Takeaways

  • An SEP account lets self-employed people and small business owners save for retirement with contribution limits much higher than a regular IRA — up to 25% of your net self-employment income or a set dollar amount that changes yearly.
  • You choose how much to contribute each year, and there is no minimum contribution required, so you can adjust based on how much your business earns.
  • Money you put into an SEP account reduces your taxable income for that year, which can lower your tax bill.
  • You can open an SEP account at a bank, credit union, or investment firm, and the setup takes minimal paperwork compared to other retirement plans.
  • If you have employees, you must contribute the same percentage of their salary that you contribute for yourself, which is why many solo business owners choose an SEP.

How much you can contribute each year

The amount you can put into an SEP account each year depends on how much your business makes. The IRS sets a maximum contribution limit, and it changes slightly each year. For 2024, the limit is 25% of your net self-employment income, up to a dollar amount set by the IRS (that dollar amount increases annually for inflation).

Here is what that means in practice: if you are a freelancer earning $50,000 a year after business expenses, you could contribute up to 25% of that — roughly $12,500. If you earn $100,000, you could contribute up to 25% of that — roughly $25,000. You do not have to hit the maximum every year. In a slow year, you can contribute less or nothing at all.

This is one reason an SEP is popular with self-employed people: the contribution limit is much higher than a regular IRA, where the limit is the same for everyone regardless of income. If you have employees, though, the rules change — you must contribute the same percentage of their salary that you contribute for yourself.

Who can open an SEP account

You can open an SEP account if you have any self-employment income. That includes freelancers, contractors, sole proprietors, and partners in a business. You do not need to have a formal business structure — even if you are just doing side work and reporting it on Schedule C of your tax return, you can open an SEP.

If you have employees, you can still open an SEP, but there is a catch: you must contribute the same percentage of salary for each employee that you contribute for yourself. For example, if you contribute 15% of your own income, you must contribute 15% of each employee's salary too. This is why many small business owners with employees choose a solo 401(k) instead, which has different rules.

You do not need to be incorporated or have a business license to open an SEP. You just need to have earned self-employment income in the year you want to make a contribution.

How to open an SEP account

Opening an SEP account takes three basic steps. First, choose where to open it — a bank, credit union, brokerage firm, or investment company. Most of these institutions offer SEP accounts and can walk you through the process.

Second, fill out a form called an IRS Form 5305-SEP or a similar document that the institution provides. This form is straightforward and takes just a few minutes. It establishes the account and sets the rules for how much you can contribute. You do not file this form with the IRS — you keep it with your records.

Third, fund the account. You can do this by transferring money from your business checking account or personal account. You can make contributions anytime up until the tax filing important date for that year, including extensions. For example, if you want to contribute for 2024, you have until April 15, 2025, or later if you file an extension.

Tax benefits of an SEP account

The main tax benefit is that money you contribute to an SEP account reduces your taxable income. If you earn $80,000 and contribute $15,000 to an SEP, you only pay income tax on $65,000. This can lower your tax bill significantly, especially if you are in a higher tax bracket.

The money inside the account grows tax-free. You do not pay taxes on investment gains, dividends, or interest while the money is in the account. You only pay taxes when you withdraw the money in retirement.

When you withdraw money in retirement, you pay income tax on it at your regular tax rate. If you are retired and in a lower tax bracket, you may pay less tax on the withdrawal than you would have if you had not put the money in the SEP in the first place.

SEP accounts versus other retirement options

A regular IRA is simpler to open and has no paperwork, but the contribution limit is much lower — the same for everyone, regardless of income. An SEP lets you save much more if you have a higher income.

A solo 401(k) (also called a one-participant 401(k)) has higher contribution limits than an SEP and more flexibility if you have employees. However, it requires more paperwork and record-keeping each year. If you have no employees and want simplicity, an SEP is usually the better choice.

A straightforward IRA is designed for businesses with up to 100 employees. It has lower contribution limits than an SEP but requires less paperwork than a 401(k). If you are a solo freelancer, an SEP is usually better.

What happens when you retire or need the money

You can withdraw money from your SEP account anytime, but there are rules. If you withdraw before age 59½, you typically pay a 10% penalty on top of regular income tax, with some exceptions for hardship or disability. Once you turn 59½, you can withdraw without the penalty, though you still pay income tax.

You must start taking withdrawals by April 1 of the year after you turn 73. These are called required minimum distributions, and the IRS calculates how much you must withdraw each year based on your age and account balance. If you do not take the required amount, you face a steep penalty.

If you pass away, your beneficiaries inherit the account and can withdraw the money, though they will owe income tax on it. The rules for inherited SEP accounts are complex, so it is worth discussing with a tax professional or the institution holding your account.

Frequently Asked Questions

Can I have both an SEP account and a regular IRA?

Yes, you can have both. However, if you have a regular IRA and earn self-employment income, there are income limits on whether you can deduct contributions to the regular IRA. An SEP account does not have this limit. Talk to a tax professional about which makes sense for your situation.

What if my business has a loss one year?

You do not have to contribute to your SEP account in years when your business loses money or breaks even. You can skip contributions entirely or contribute less. This flexibility is one reason many self-employed people prefer an SEP to other retirement plans.

Can I move money from an SEP account to another retirement account?

Yes, you can roll over money from an SEP to a regular IRA or another SEP account. The rules are the same as rolling over any retirement account — you have 60 days to complete the transfer, or you can do a direct transfer where the institution moves the money without you touching it.

Do I need to report my SEP account to the IRS every year?

You do not file the SEP form itself with the IRS. However, you report your contributions on your tax return (Form 1040) when you file. The institution holding your account may send you a statement for your records, but you do not send anything to the IRS about the account itself.

What if I close my business but still have money in the SEP?

The money stays in your SEP account and continues to grow. You can keep it there until retirement, or you can roll it over to an IRA or another retirement account. Closing your business does not force you to withdraw the money or close the account.