What Is a SEP-IRA? Contribution Limits, Rules, and How It Works for the Self-Employed
Last updated 04/08/2026 by
Ante Mazalin
Edited by
Andrew Latham
Summary:
A SEP-IRA (Simplified Employee Pension Individual Retirement Account) is a tax-deferred retirement account designed for self-employed individuals and small business owners, with contribution limits up to $69,000 in 2024 — nearly 10 times the standard IRA limit.
Its appeal comes from three core features.
- High contribution limits: Contributions can reach up to 25% of compensation or $69,000 (2024), whichever is less — making it the highest-limit retirement account available to the self-employed without the administrative burden of a 401(k).
- Simple setup and administration: No annual IRS filings (Form 5500), no non-discrimination testing, and no complex plan documents — just an IRS Form 5305-SEP and a brokerage account.
- Flexible contributions: You’re not required to contribute every year. In lean years, you can contribute nothing; in strong years, you can maximize. This flexibility suits variable-income businesses.
For freelancers, consultants, sole proprietors, and small business owners, a SEP-IRA is typically the first retirement account to consider after maxing a Roth IRA — it offers substantially higher contribution limits with almost no administrative overhead.
How a SEP-IRA Works
A SEP-IRA functions similarly to a traditional IRA in terms of tax treatment: contributions are tax-deductible in the year made, investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income.
The same early withdrawal rules apply — a 10% penalty plus income tax for distributions before age 59½.
The key difference from a standard IRA is who contributes and how much. Only the employer contributes to a SEP-IRA — employees cannot make their own salary deferrals. For a self-employed person, you are both the employer and the employee.
SEP-IRA Contribution Limits
| Year | Maximum Contribution | % of Compensation Cap |
|---|---|---|
| 2024 | $69,000 | 25% |
| 2025 | $70,000 | 25% |
For self-employed individuals, the calculation is slightly more complex. You can contribute up to 25% of net self-employment income — but “net” means after deducting half of self-employment tax and the SEP contribution itself. The effective maximum contribution rate works out to approximately 20% of net self-employment earnings before the SEP deduction.
The IRS provides worksheets in Publication 590-A to calculate the exact deductible amount, or most tax software handles this automatically.
SEP-IRA vs. Solo 401(k)
The Solo 401(k) is the main alternative for self-employed individuals without employees. The comparison comes down to income level, Roth preference, and plan complexity.
| Feature | SEP-IRA | Solo 401(k) |
|---|---|---|
| 2024 maximum contribution | $69,000 | $69,000 (+ $7,500 catch-up if 50+) |
| Who can contribute | Employer only | Both employee and employer |
| Roth option available | No | Yes |
| Employees allowed | Yes (must cover all eligible) | No (owner and spouse only) |
| Annual IRS filing required | No | Yes (Form 5500 when assets exceed $250K) |
| Loan provision | No | Yes |
| Best for | Simplicity, variable income, businesses with employees | Higher contributions at lower income, Roth access, no employees |
At lower income levels, the Solo 401(k) often allows higher contributions because it combines an employee salary deferral ($23,000 in 2024) plus an employer profit-sharing contribution. At higher income levels, both plans approach the same $69,000 ceiling.
Pro Tip: SEP-IRA contributions for a given tax year can be made up to the tax filing deadline — including extensions. If you file an extension to October 15, you have until that date to make and deduct a SEP-IRA contribution for the prior year.
This makes a SEP-IRA one of the last available levers to reduce taxable income after the calendar year has ended, which is particularly useful when you don’t know your final income until tax time.
SEP-IRA Rules for Business Owners with Employees
If you have employees, a SEP-IRA requires you to cover all eligible employees — those who are at least 21, have worked for you in at least three of the last five years, and have earned at least $750 in 2024. You must contribute the same percentage of compensation for all eligible employees as you contribute for yourself.
This can make SEP-IRAs expensive for businesses with staff. If you contribute 20% of your own compensation, you must contribute 20% of each eligible employee’s compensation as well. Businesses with employees often find the SIMPLE IRA or a traditional 401(k) more practical, since those plans shift some contribution burden to employees.
Withdrawals and RMDs
SEP-IRA withdrawals follow the same rules as traditional IRAs. Qualified withdrawals after age 59½ are taxed as ordinary income. Early withdrawals trigger a 10% penalty plus income tax, with exceptions for disability, first-home purchase ($10,000 lifetime limit), substantially equal periodic payments (SEPP), and a few other qualifying events.
Required Minimum Distributions (RMDs) begin at age 73 under SECURE 2.0. SEP-IRA funds can be rolled into a traditional IRA or rolled over to a 401(k) without tax consequences.
Key takeaways
- A SEP-IRA allows self-employed individuals and small business owners to contribute up to $69,000 (2024) or 25% of compensation — roughly 10x the standard IRA limit.
- Only employers contribute; employees cannot make salary deferrals into a SEP-IRA.
- Contributions are tax-deductible, investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income — same structure as a traditional IRA.
- No annual IRS filings required, no non-discrimination testing, and contributions are flexible year to year — making it the simplest high-limit retirement account available.
- Businesses with employees must contribute the same percentage of compensation for all eligible staff as they contribute for themselves.
- SEP-IRA contributions can be made up to the tax filing deadline including extensions, making it a useful year-end tax planning tool.
Frequently Asked Questions
Can I have both a SEP-IRA and a Roth IRA?
Yes. You can contribute to both a SEP-IRA and a Roth IRA in the same year, provided your income falls within the Roth IRA eligibility limits. The contribution limits are separate — your SEP-IRA contributions don’t count against your $7,000 Roth IRA limit.
Many self-employed individuals use a SEP-IRA for pre-tax contributions and a Roth IRA for tax-free growth.
Can a sole proprietor open a SEP-IRA?
Yes. Any self-employed person with net earnings from self-employment — sole proprietors, independent contractors, freelancers, and partners in a partnership — can open a SEP-IRA. You don’t need employees or a formal business entity.
You can open one at any major brokerage or financial institution with minimal paperwork.
What happens to my SEP-IRA if I hire employees?
Once you hire eligible employees, you’re required to contribute for them at the same percentage rate as you contribute for yourself. This doesn’t happen automatically — it becomes an obligation you must budget for.
If the cost becomes prohibitive, transitioning to a SIMPLE IRA or 401(k) plan may make more sense as your team grows.
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