What Is a SEP IRA? The Retirement Account for the Self-Employed

A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a retirement savings account designed for self-employed individuals, freelancers, and small business owners. The contribution limit is dramatically higher than a traditional or Roth IRA — up to $69,000 in 2024 — making it one of the most powerful tax-advantaged tools available to those who work for themselves.

SEP IRA Contribution Limits

For 2024, you can contribute up to 25% of net self-employment income (after deducting the employer contribution and half of self-employment tax), with a maximum of $69,000. For employees, the limit is 25% of compensation up to the same cap. Compare this to the $7,000 limit for traditional and Roth IRAs ($8,000 if 50+) — the SEP IRA allows nearly 10× the savings for high earners.

Key SEP IRA Rules

• Contributions are tax-deductible, reducing your taxable income in the contribution year.
• All investment growth is tax-deferred — you pay taxes only on withdrawals in retirement.
• Withdrawals before age 59½ are subject to regular income tax plus a 10% early withdrawal penalty.
• Required Minimum Distributions (RMDs) begin at age 73.
• You can contribute to a SEP IRA and a traditional IRA in the same year, but IRA deductibility may be limited by income.
• Contributions can be made up to the tax filing deadline (including extensions) for the prior year.

SEP IRA for Business Owners with Employees

If you have employees, a SEP IRA requires you to contribute the same percentage of compensation for all eligible employees as you contribute for yourself. An eligible employee is anyone 21 or older who has worked for the business in at least 3 of the last 5 years and earned at least $750 in the current year. This can make the SEP expensive for businesses with staff, where a Solo 401(k) is often better for owner-only businesses.

SEP IRA vs. Solo 401(k)

• SEP IRA: Simpler to set up. Works with employees. Contribution is employer-only (no employee contribution). Limit: 25% of net income up to $69,000.
• Solo 401(k): For self-employed with no employees (except spouse). Allows both employee and employer contributions. Can reach $69,000 limit at lower income levels. Allows Roth contributions and loans.
• Winner for most solo self-employed: Solo 401(k) because you can reach the limit at lower income.

How to Open a SEP IRA

Opening a SEP IRA is straightforward. Any major brokerage (Fidelity, Schwab, Vanguard) offers them with no account fees. You complete IRS Form 5305-SEP (or the brokerage's equivalent), open the account, and make contributions by your tax filing deadline. There are no annual filing requirements with the IRS as long as the account holds under $250,000 in assets.