What Is a SEP IRA?

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A SEP IRA, or Simplified Employee Pension IRA, is a retirement savings account for self-employed individuals and business owners. They’re a type of traditional IRA, meaning they follow similar tax rules.

Like traditional IRAs, your SEP IRA contributions are tax-deductible for your business or self-employed work. Contributions also grow on a tax-deferred basis until you start withdrawing from that account in retirement. At that point, they’re considered taxable income.

How SEP IRAs Work

A little over half of civilian employees — 56% — save for retirement using an employer-sponsored retirement plan. But if you’re self-employed or own a business, you’ll need to establish your own retirement plan.

That’s where SEP IRAs come in.

A SEP IRA is a simple, no-frills retirement account available to businesses of any size. That said, they’re mostly geared toward small business owners (including S corporations and sole proprietorships), partnerships and self-employed individuals.

These accounts have minimal fees and are easy to set up. SEP IRAs do have contribution limits, but the business owner can contribute as much — or as little — as they see fit in any given year (up to the limit). Business owners can contribute toward their own retirement savings and their employees’.

If an employer sets up a SEP IRA and has 100 or fewer employees, they may be eligible for a maximum tax credit of $5,000 for the first 3 years. This tax credit can reduce your tax liability on a dollar-for-dollar basis, thereby offsetting any startup costs.

SEP IRA contributions are tax-deductible for the employer. The money also grows on a tax-deferred basis, meaning account holders won’t pay any taxes until they start taking distributions at retirement.

Note that anyone participating in a SEP IRA — whether it’s the business owner or their employee — must set up a traditional IRA for contributions to go into. The account holder must also decide how to invest their contributions, based on the specific plan’s available options. Contributions are 100% vested, meaning the employee owns them completely.

SEP IRA Contribution Rules

Like any retirement savings account, SEP IRAs must follow certain contribution rules. Here’s the eligibility criteria for the employer:

• Any size business can open a SEP IRA (but these plans are generally geared toward those with few to no employees)
• The business must establish a SEP IRA via a written agreement
• Only the business can contribute
• Contributions must be made equally across all eligible employees

For an employee to be eligible, they typically must:

• Be at least 21 years old
• Have worked for the business for 3 of the previous 5 years
• Earn at least $750 a year from the business (subject to change)

The business owner — or owners — must also meet the above criteria to participate in a plan. The business owner may set additional eligibility requirements later on.

As per IRS rules, each employee (business owner included) owns and controls their SEP IRA. This means the employer cannot forfeit or take control of the account balance.

It’s also worth noting that SEP IRAs have income limitations. The total income limit across all account participants is $345,000 as of 2024.

Some employees, such as those involved in a union collective bargaining agreement, may be excluded from a SEP IRA. As long as they don’t receive U.S. wages or service compensation from the business nonresidents may also be excluded.

SEP IRA Contribution Limits

In 2025, the SEP IRA contribution limits are the lesser of:

• $70,000 (up from $69,000 in 2024)
• 25% of each employee’s (or self-employed individual’s) net earnings

Say, for example, Jane earns $150,000 a year. The contribution limit would be 25% of $150,000, or $37,500.

Unlike some other retirement accounts, like traditional IRAs, SEP IRAs don’t have a catch-up contribution at age 50 and up. Employees also cannot borrow against their account balance.

SEP IRA Contribution Deadlines

The regular SEP IRA contribution deadline is April 15 — the same day federal taxes are due. If necessary, the business may file an extension. In this case, the new contribution deadline is typically October 15.

If you don’t request an extension, or if you miss the deadline, you won’t be able to deduct any SEP IRA contributions for the year’s tax return. You’ll have to wait until the following year’s return.

SEP IRA vs. Other Retirement Accounts

A SEP IRA isn’t the only retirement savings plan out there. Here are a few common options and who they’re best suited for:

• SEP IRA: These accounts are geared toward self-employed individuals and small business owners. They have minimal fees and are easy to set up. Contributions are tax-deductible and grow tax-free. The annual contribution limit is higher than many other retirement accounts, but only the employer can contribute. There are no catch-up contributions.
• Traditional IRA: Designed for self-employed individuals, these plans are best for those who anticipate being in a lower tax bracket after retiring. Contributions can lower your tax liability in the year they’re made, but withdrawals are taxed as regular income. You must take distributions when you turn 73.
• Roth IRA: Roth IRA contributions aren’t tax-deductible, but you also aren’t taxed when you withdraw from the account. The annual limit in 2024 was $7,000 (or $8,000 if you’re 50 or older). There’s no required minimum distribution, so you can leave the money for your heirs.
• Solo 401(k): A solo 401(k) is a retirement savings plan designed for one participant — generally either a business owner with no employees, or them and their spouse. The maximum contribution limit in 2025 is $23,500. Those ages 50 and up can make a catch-up contribution. Like SEP IRAs, solo 401(k) plans are best for small business owners or self-employed individuals.

Pros and Cons of a SEP IRA

Some of the biggest advantages of opening a SEP IRA include:

• High contribution limits compared to other retirement savings accounts ($70,000 in 2025)
• East setup and administration
• Flexible contributions based on business performance
• Account holders can also have a traditional or Roth IRA
• Tax-deductible contributions
• Tax credit for account setup

The key drawbacks to SEP IRAs are:

• Employer-only contributions
• No catch-up contributions for those over the age of 50
• Required proportional contributions for eligible employees
• Minimum distributions required at age 73
• Withdrawing from the account before age 59 ½ come with a 10% penalty (early withdrawal exceptions apply)

Opening a SEP IRA

Opening a SEP IRA is fairly straightforward:

1. Execute a formal written agreement using either your account provider or IRS Form 5305-SEP.
2. Provide your employees with the necessary information.
3. Establish an IRA account for each participating employee.

You can open a SEP IRA at an insurance company, bank or other eligible financial institution. Just know that your investing options will generally be limited to what that institution offers. Consider your risk tolerance, typical returns, current age and planned retirement age when deciding where to set up an account.

The Bottom Line

A SEP IRA is a retirement savings plan geared toward self-employed individuals and business owners (especially those with few employees). To establish one, the business owner (or self-employed person) must select a plan provider — like a bank or insurance company — and start making contributions.

SEP IRA rules may vary slightly by plan, but contribution limits are higher than other options like 401(k) plans or traditional IRAs. Contributions are tax-deductible and can benefit from tax-free compounding growth, but distributions are taxable.

Businesses of any size may participate in a SEP IRA, but the employer must make equal contributions across all eligible participating employees. Before participating in a SEP IRA, consult a financial advisor for personalized advice.

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