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Self-employed and need a retirement account? A SEP IRA lets you contribute up to 25% of net self-employment income, up to $72,000 in 2026, with about 15 minutes of setup, minimal paperwork, and a large tax deduction.
If you are self-employed, freelancing, running a side business, or doing contract work, you do not have an employer setting up a 401(k) for you. But you have access to something potentially better: a SEP IRA (Simplified Employee Pension Individual Retirement Account). It is the self-employed person’s entry on the retirement account roadmap.
A SEP IRA lets you contribute up to 25% of your net self-employment income, with a maximum of $72,000 in 2026. That is far more than the $7,500 annual limit on a Traditional or Roth IRA, and competitive with a 401(k). The setup takes about 15 minutes, the paperwork is minimal, and the tax deduction is substantial.
- The effective SEP IRA contribution limit for sole proprietors is roughly 20% of net profit (not 25%), because you first subtract the deductible half of self-employment tax. On $100,000 in net self-employment income, the maximum is about $18,587, not $25,000. The IRS provides worksheets in Publication 560 for the exact calculation.
- You can contribute to a SEP IRA and your employer’s 401(k) at the same time. If you have a W-2 job with a 401(k) plus self-employment income, your 401(k) employee contributions ($24,500 in 2026) and SEP IRA contributions (25% of side-business income) are separate limits, both usable subject to the $72,000 overall cap across plans.
- The SEP IRA contribution deadline is your tax filing deadline including extensions. If you extend to October 15, you have until October 15 to fund the SEP IRA for the prior tax year. That is unique among retirement accounts and lets you see final income numbers first.
- SEP IRA balances trigger the pro-rata rule if you also want to do a backdoor Roth conversion. If the backdoor Roth is part of your plan, a Solo 401(k) may fit better, since its balance does not count in the pro-rata calculation.
- There is no minimum annual contribution. You can contribute the maximum one year and nothing the next, which suits self-employed people with variable income.
Calculate your maximum SEP IRA contribution
SEP IRA Contribution Calculator
See your maximum contribution and estimated tax savings. Estimates only, not tax advice.
How does a SEP IRA work?
A SEP IRA is a Traditional IRA with much higher contribution limits, designed for self-employed individuals and small business owners.
Open at any major brokerage. Fidelity, Schwab, and Vanguard all offer free SEP IRA accounts with no annual fees and access to low-cost index funds. The application is similar to opening a regular IRA.
All contributions are employer contributions. Even if you are a solo freelancer, the IRS treats you as both the employer and the employee, so all SEP IRA contributions are employer contributions. No employee deferral elections are required; you simply decide the amount during the year or when filing your taxes.
Contributions are tax-deductible. SEP IRA contributions reduce your taxable income dollar-for-dollar. On $100,000 in self-employment income with an $18,000 SEP contribution, your taxable income drops to $82,000. At a 22% marginal rate, that saves roughly $3,960 in federal income tax.
Money grows tax-deferred, withdrawals taxed in retirement. Identical to a Traditional IRA: investments grow without annual taxes, but you pay ordinary income tax on withdrawals after 59.5. Early withdrawals before 59.5 generally incur income tax plus a 10% penalty.
Required Minimum Distributions start at age 73, the same as Traditional IRA rules.
What is the contribution deadline advantage?
Unlike 401(k) employee deferrals (which must be elected during the calendar year), SEP IRA contributions can be made until your tax filing deadline including extensions. Extend to October 15 and you have until October 15 of the following year to fund your SEP IRA for the prior tax year.
That means you can wait until your income is finalized, even past April 15, before deciding how much to contribute. You calculate your exact profit on your tax return, then fund the maximum allowable SEP contribution.
SEP IRA vs Solo 401(k): which is better?
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Max contribution (2026) | Up to $72,000 | Up to $72,000 ($24,500 employee + employer) |
| At low income levels | Lower (25% only) | Higher ($24,500 employee deferral from dollar one) |
| Roth option | No | Yes (Roth elective deferrals) |
| Backdoor Roth impact | Yes, triggers pro-rata rule | No, does not affect pro-rata calculation |
| Loan provision | No | Yes (borrow up to $50K) |
| Setup complexity | Very easy (Form 5305-SEP) | Moderate (plan document required) |
| Catch-up contributions (age 50+) | No | Yes ($8,000 extra in 2026) |
| Employees allowed | Yes (must cover all eligible) | No (solo or spouse only) |
| Contribution deadline flexibility | Tax filing deadline + extensions | Employee deferrals by Dec 31; employer by tax deadline |
A SEP IRA may fit if: you want the simplest setup, your self-employment income is high enough that 25% employer contributions reach a meaningful amount, you do not need a Roth option, and you do not plan to do a backdoor Roth IRA.
A Solo 401(k) may fit if: you want to maximize contributions at lower income levels (the $24,500 employee deferral is available from the first dollar of income), you want a Roth option, you plan to use the backdoor Roth strategy, or you are over 50 and want catch-up contributions.
Income crossover: below roughly $75,000 in net self-employment income, the Solo 401(k) often allows a higher contribution because of the employee deferral. Above that, the difference narrows, and both reach the same $72,000 cap at high income levels.
How do you open a SEP IRA in 3 steps?
- Choose a brokerage. Fidelity, Schwab, and Vanguard all offer free SEP IRA accounts. Opening one is free and takes about 15 minutes online.
- Complete IRS Form 5305-SEP. This one-page form establishes your SEP plan. You do not file it with the IRS; you keep it for your records, and most brokerages handle it as part of opening the account.
- Fund and invest. Transfer money from your business or personal checking account, then invest it. A SEP IRA is an account, not an investment, so choose low-cost index funds, a target-date fund, or a 3-fund portfolio, the same as you would in a 401(k) or IRA.
Common SEP IRA mistakes
Opening only a Roth IRA and stopping there. Many self-employed people open a Roth IRA ($7,500 max) and think they are done. If your income supports it, a SEP IRA at $15,000 to $72,000 delivers a far larger deduction and nest egg. Both accounts can be used at the same time.
Forgetting the pro-rata rule. If you plan to do a backdoor Roth conversion, your SEP IRA balance counts as pre-tax IRA money, triggering the pro-rata rule and making the conversion partly taxable. One fix: roll the SEP IRA into a Solo 401(k) to clear the issue before doing backdoor Roth conversions.
Not investing the contributions. Money deposited into a SEP IRA sits in a money market fund until you invest it. Choose your investments right after contributing, rather than leaving cash uninvested.
Having employees and not covering them. If you have eligible employees (worked for you in 3 of the last 5 years, earned at least $750, and are 21+), you must contribute the same percentage for them as for yourself. Contributing 20% for yourself means 20% for every eligible employee, which can get expensive. A Solo 401(k) or SIMPLE IRA is often better for businesses with multiple employees.
Frequently Asked Questions
Yes. If you have a W-2 job with a 401(k) and self-employment income on the side, you can contribute to both. The 401(k) employee limit ($24,500 in 2026) and the SEP IRA limit (25% of self-employment income) are separate, though total employer contributions across plans cannot exceed $72,000. For example, $24,500 in 401(k) contributions plus a $15,000 SEP IRA from freelance income is $39,500 in combined contributions, both deductible.
Your tax filing deadline including extensions, usually April 15, or October 15 if you file an extension. So 2026 SEP IRA contributions can be made as late as October 15, 2027 with an extension. That is a real advantage over 401(k) employee deferrals, which must happen during the calendar year, and it lets you finalize income before choosing an amount.
Yes. You can convert SEP IRA funds to a Roth IRA at any time. The converted amount counts as ordinary income in the year of conversion, so you owe income tax on it. This often makes sense in a low-income year (lower bracket, lower conversion cost) or as part of a Roth conversion ladder. The converted amount must meet the Roth 5-year requirement before a qualified penalty-free withdrawal.
No, SEP IRAs are Traditional (pre-tax) only. For Roth contributions from self-employment income, you can use a Solo 401(k) with Roth elective deferrals (up to $24,500 in 2026), or a separate Roth IRA up to the $7,500 limit (if your income qualifies) or via a backdoor Roth. Many self-employed people use a SEP IRA for the large pre-tax deduction plus a Roth IRA for tax-free growth.
Yes, the flexibility is one of its biggest advantages for variable income. There is no required minimum contribution, so you can contribute the maximum in a strong year and nothing in a slow year with no plan fees or penalties. That differs from a Solo 401(k), where employee deferral elections should be made before year-end, and a SIMPLE IRA, which expects regular contributions.
Nothing automatic. Your existing SEP IRA stays open and keeps growing tax-deferred. You just cannot make new SEP contributions unless you still have self-employment income. You can leave it, roll it into your new 401(k) (if the plan accepts rollovers), or roll it into a Traditional IRA. Note: if you plan to do backdoor Roth conversions, the SEP balance triggers the pro-rata rule, and rolling it into the 401(k) removes it from that calculation.
SEP IRA contributions reduce your income tax but not your self-employment tax, which is what funds Social Security credits. SE tax (15.3%) is calculated on your net self-employment income before the SEP deduction, so a large SEP contribution does not reduce your Social Security credits or future benefits. You still pay SE tax on the full net profit, and it still counts toward your earnings record.
The bottom line
If you are self-employed and not using a SEP IRA or Solo 401(k), you may be missing one of the largest legal tax deductions available. A $20,000 SEP IRA contribution can save roughly $4,400 to $6,400 in federal income tax depending on your bracket, and that money goes into tax-deferred investments instead of to the IRS.
Use the calculator above to see your maximum contribution and estimated tax savings. You can open a SEP IRA at Fidelity, Schwab, or Vanguard: free account, about 15 minutes, no annual fees.
- New to retirement accounts? Start with our hub, Retirement Accounts Explained.
- Comparing SEP IRA vs Solo 401(k) for your income? Read our 401(k) maximization guide, which covers the Solo 401(k) employee deferral structure.
- Planning a backdoor Roth alongside your SEP IRA? Read our backdoor Roth guide, including the pro-rata rule and pre-existing IRA balances.
- Targeting early retirement with self-employment savings? Read our Roth conversion ladder guide.
A quick note: this article is for educational purposes only and is not financial, investment, or tax advice. Contribution limits come from the IRS and apply to tax year 2026; verify current figures and the exact contribution calculation (IRS Publication 560) before you act. Everyone’s situation is different, so it is worth talking with a CPA or qualified tax professional about yours.
