A SEP IRA lets you set aside money for retirement with much higher contribution limits than a regular IRA, and it's designed for self-employed people and small business owners.

SEP stands for Simplified Employee Pension. The core idea is straightforward: you contribute to your own retirement account, and if you have employees, you contribute to theirs too on the same percentage basis. The contribution limits are the real draw — for 2024, you can set aside up to 25% of your net self-employment income or $69,000, whichever is less. That's roughly five times what you can put into a regular IRA.

The trade-off is that a SEP IRA is less flexible than other retirement accounts. You can't borrow from it. You can't make catch-up contributions if you're over 50. And if you have employees, you must contribute the same percentage of compensation for each one that you contribute for yourself — you can't just fund your own account and leave theirs empty.

Key Takeaways

  • A SEP IRA lets you contribute up to 25% of your net self-employment income, with a 2024 limit of $69,000 per year.
  • If you have employees, you must contribute the same percentage of their compensation that you contribute for yourself.
  • You can open and fund a SEP IRA up until your tax filing important date, including extensions, which makes it useful for tax planning in the year after you've already earned the income.
  • Money in a SEP IRA grows tax-deferred, and withdrawals in retirement are taxed as ordinary income.
  • A SEP IRA is simpler to set up and maintain than a Solo 401(k), but offers lower contribution limits if you have significant self-employment income.

How much you can contribute each year

Your contribution limit depends on your net self-employment income — the profit from your business after you subtract business expenses and half of your self-employment tax. You can contribute up to 25% of that figure, up to the annual maximum. For 2024, that maximum is $69,000. The limit increases slightly most years to account for inflation.

The 25% calculation is not straightforward if you're self-employed, because you have to account for self-employment tax. If you earn $100,000 in net profit, your actual contribution limit is not $25,000 — it's slightly less, because the calculation reduces your income by half of your self-employment tax first. Most tax software and SEP IRA providers include a worksheet to calculate this correctly.

You don't have to contribute the same amount every year. You could contribute 15% one year and 25% the next, or skip a year entirely. This flexibility is one reason a SEP IRA appeals to people whose income varies — freelancers, contractors, and business owners with uneven revenue.

The employee contribution requirement

If you have employees, this is where a SEP IRA becomes complicated. You must contribute the same percentage of compensation for each employee that you contribute for yourself. If you put 20% of your own income into the SEP, you must put 20% of each employee's salary into their SEP IRA too.

There's an exception: employees must have earned at least $650 in compensation during the year and worked for you in at least three of the past five years to be covered. So a part-time employee who just started, or a seasonal worker, might not trigger the requirement. But once an employee meets those thresholds, you're obligated to fund their account at your chosen percentage.

This requirement is why many self-employed people without employees choose a SEP IRA — they get the high contribution limits without the obligation to fund anyone else's retirement. If you later hire an employee, you can still maintain the SEP, but you'll need to start making contributions for them too.

When you can open and fund a SEP IRA

You can open a SEP IRA at any point during the year, but the real advantage comes at tax time. You can fund a SEP IRA for a given tax year up until your tax filing important date, including extensions. If you file by April 15, 2025, you can still open and fund a SEP IRA for the 2024 tax year on April 14, 2025.

This timing window is useful for tax planning. You might not know your exact income until late in the year or early the next year. Once you know the number, you can calculate your maximum contribution and fund the account before the important date. This lets you reduce your taxable income for that year without having committed the money months earlier.

If you file an extension, the important date moves to October 15. So if you file a six-month extension on your 2024 return, you can fund a 2024 SEP IRA anytime up to October 15, 2025.

How the money grows and what happens at withdrawal

Money in a SEP IRA grows tax-deferred. You don't pay income tax on the investment gains, dividends, or interest while the money sits in the account. You only pay tax when you withdraw it in retirement, at which point the withdrawal is taxed as ordinary income at your regular tax rate.

You can't withdraw money before age 59½ without paying a 10% early withdrawal penalty, with limited exceptions for disability or medical hardship. Once you turn 73, you must begin taking required minimum distributions — the IRS calculates how much you must withdraw each year based on your age and account balance.

If you have both a SEP IRA and a regular IRA, the required minimum distribution rules treat them separately. You calculate what you owe from each account, but you can withdraw the total from whichever account you choose.

SEP IRA versus Solo 401(k)

If you're self-employed with no employees, you might also consider a Solo 401(k), sometimes called a Solo(k) or Individual 401(k). Both let you set aside significantly more than a regular IRA, but they work differently.

A Solo 401(k) lets you contribute as both an employee and an employer. In 2024, you can contribute up to $23,500 as an employee, plus up to 25% of your net self-employment income as an employer, for a combined limit of $69,000 — the same as a SEP IRA. But a Solo 401(k) also lets you borrow against your balance, which a SEP IRA does not. A Solo 401(k) requires more paperwork and record-keeping, and you may need to file an annual form with the IRS if your balance exceeds $250,000.

A SEP IRA is simpler to set up and maintain. You fill out a one-page form, and there's no annual filing requirement. If simplicity matters more to you than the ability to borrow, a SEP IRA is usually the better choice.

Tax treatment and deductions

Contributions to a SEP IRA are tax-deductible in the year you make them. If you contribute $50,000 to a SEP IRA for the 2024 tax year, you can deduct that $50,000 from your 2024 income, reducing your taxable income and your tax bill.

If you're self-employed, you report the contribution on Schedule C (your business income and loss form) and then deduct it on your individual tax return. The exact line depends on your tax software or your accountant's process, but the deduction flows through to reduce your adjusted gross income.

Withdrawals in retirement are taxed as ordinary income. If you withdraw $60,000 in a year when you're retired, that $60,000 is added to your other income for the year and taxed at your marginal rate. This is different from a Roth IRA, where may have access to withdrawals are tax-free, but a SEP IRA doesn't have a Roth option.

Frequently Asked Questions

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

Yes, but your regular IRA contributions may not be tax-deductible if you have a SEP IRA and your income exceeds certain thresholds. For 2024, if you're covered by a SEP IRA and your modified adjusted gross income is above $77,000 (single) or $123,000 (married filing jointly), you can't deduct regular IRA contributions. You can still contribute to a regular IRA, but it won't reduce your taxes.

What happens to my SEP IRA if I sell my business?

Your SEP IRA stays yours. Selling the business doesn't affect the account. The money continues to grow tax-deferred, and you follow the same withdrawal rules. If you hire new employees at a new business, you'd need to set up a new SEP IRA for that business, or you could maintain both accounts separately.

Can I roll a SEP IRA into another retirement account?

Yes. You can roll a SEP IRA into another SEP IRA, a regular IRA, or a 401(k) plan. The rollover must happen within 60 days to avoid taxes and penalties. If you roll into a regular IRA, the money is treated the same as any other IRA money — same withdrawal rules, same required minimum distributions at age 73.

What if my income drops significantly one year?

You don't have to contribute anything. SEP IRA contributions are optional each year. If your income drops, you can skip that year's contribution entirely, or contribute a smaller percentage. This flexibility is one reason self-employed people with variable income prefer a SEP IRA to a Solo 401(k), which has more rigid rules.

Do I need to file anything with the IRS to open a SEP IRA?

No. You open a SEP IRA through a bank, brokerage, or other financial institution, and you fill out their SEP IRA adoption agreement. There's no IRS filing required unless your account balance exceeds $250,000 and you have a Solo 401(k) instead. The contribution itself is reported on your tax return, but the account opening is between you and the financial institution.