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SEP IRA

The plain answer

Section titled “The plain answer”

A SEP IRA, short for Simplified Employee Pension IRA, is a retirement account funded by an employer. If you are self-employed, you are both the business owner and the person receiving the contribution.

The main appeal is flexibility. Your business can contribute in a strong year and contribute less, or nothing, in a lean year. The contribution is an employer contribution. Employee elective deferrals belong to other plan types, such as a Solo 401(k), and are not a SEP feature.

How it actually works

Section titled “How it actually works”

The business establishes the SEP and contributes to an IRA for each eligible participant. Contributions are generally tax deductible to the business, grow tax deferred inside the account, and are generally taxable when withdrawn.

SEP contributions follow percentage-of-compensation rules. For a sole proprietor or partner, the calculation uses adjusted net earnings from self-employment, not gross revenue. Because the contribution can change the compensation used in the calculation, tax software or a qualified tax professional can help determine the allowed amount.

If the business has eligible employees, the employer generally must use the same contribution percentage for them that it uses for the owner. That requirement can make a SEP more expensive after hiring.

What this means for you

Section titled “What this means for you”

A SEP IRA can fit a freelancer or owner who wants straightforward administration, has no employees or is prepared to contribute for eligible employees, and values the option to change the employer contribution from year to year.

Before opening one, compare it with a Solo 401(k). A Solo 401(k) may allow both an employee elective deferral and an employer contribution, while a SEP uses employer contributions only. The better choice depends on business income, other workplace plans, employees, desired contribution, and tolerance for administration.

Common mistakes

Section titled “Common mistakes”
  • Treating gross business revenue as the compensation used for the contribution calculation.
  • Calling a personal deposit an employee elective deferral. SEP funding uses an employer contribution formula.
  • Forgetting that eligible employees generally must receive the same contribution percentage as the owner.
  • Assuming the business must contribute every year. SEP contributions can vary by year, subject to the plan terms and contribution rules.
  • Waiting until tax filing time to compare plan choices, deadlines, and deduction rules.
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Educational content, not personalized financial, tax, or legal advice. No affiliate relationships. Figures are for tax year 2026 and change annually.Read the full disclaimer.