SEP IRA
A SEP IRA (Simplified Employee Pension IRA) is a retirement plan designed for self-employed individuals and small business owners, allowing contributions of up to 25% of compensation with a much higher dollar ceiling than standard IRAs.
The Simplified Employee Pension IRA was designed to give small business owners and self-employed individuals a simple, low-cost way to save for retirement while potentially receiving a large tax deduction. Unlike a 401(k), a SEP IRA requires no complex annual testing, filing of Form 5500, or administrative overhead — setup requires only completing IRS Form 5305-SEP or a financial institution's prototype document.
For 2025, SEP IRA contributions are limited to the lesser of 25% of the participant's compensation or $70,000. For sole proprietors and self-employed individuals, the calculation is slightly different: the effective contribution rate is approximately 20% of net self-employment income after deducting half of self-employment tax. This ceiling dwarfs the $7,000 Traditional IRA limit, making the SEP IRA the go-to vehicle for high-earning freelancers, consultants, physicians, attorneys, and small business owners.
All contributions to a SEP IRA are made by the employer (even if you are your own employer), are immediately 100% vested, and are tax-deductible as a business expense. There are no employee elective deferrals — employees cannot contribute their own salary to a SEP IRA, which distinguishes it from a SIMPLE IRA or 401(k). If you have employees, the same percentage of compensation you contribute for yourself must be contributed for all eligible employees (generally those at least 21 years old, employed for three of the past five years, and earning at least $750 in 2025).
SEP IRA funds are invested in a Traditional IRA at a custodian of the employer's choosing, and the same IRA investment rules apply: the account grows tax-deferred, withdrawals in retirement are taxed as ordinary income, and distributions before age 59½ incur the 10% early withdrawal penalty (with the usual exceptions). RMDs apply starting at age 73. SEP IRAs cannot accept Roth contributions. For very high earners without employees, a solo 401(k) may ultimately allow higher total contributions and more flexibility, but the SEP IRA's simplicity makes it the first choice for many self-employed individuals.