By 
Self-employed and need a retirement account? A SEP IRA lets you contribute up to $69,000/year with minimal paperwork. Here is how it works, who qualifies, and how it compares to a Solo 401(k).
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).
A SEP IRA lets you contribute up to 25% of your net self-employment income, with a maximum of $69,000 in 2024 and $70,000 in 2025 (adjusted annually for inflation, per the IRS). That is significantly more than the $7,000 annual limit on a Traditional or Roth IRA and competitive with a 401(k)’s $23,500 employee contribution limit.
The setup takes 15 minutes. The paperwork is minimal. And the tax deduction is massive. Here is everything you need to know.
How a SEP IRA works
A SEP IRA is a Traditional IRA with higher contribution limits, designed for self-employed individuals and small business owners. The mechanics:
You open a SEP IRA at any major brokerage (Fidelity, Schwab, Vanguard). It is a standard account application, similar to opening a regular IRA. No special IRS filings required to establish the plan.
You make contributions as the “employer.” Even if you are a solo freelancer, the IRS treats you as both the employer and the employee. All SEP IRA contributions are employer contributions. This distinction matters for contribution limits and tax treatment.
Contributions are tax-deductible. SEP IRA contributions reduce your taxable income dollar-for-dollar, just like Traditional IRA contributions. If you earn $100,000 in self-employment income and contribute $25,000 to a SEP IRA, your taxable self-employment income drops to $75,000. At a 22% marginal rate, that saves you $5,500 in federal income tax.
Money grows tax-deferred. Investments in the SEP IRA grow without annual taxes on gains, dividends, or interest. You pay income tax when you withdraw in retirement.
Withdrawals work like a Traditional IRA. Withdraw after 59.5 and pay ordinary income tax. Withdraw before 59.5 and pay income tax plus a 10% penalty (with exceptions). Required Minimum Distributions (RMDs) start at age 73.
Contribution limits
The SEP IRA contribution limit is 25% of net self-employment income, up to the annual dollar cap.
For sole proprietors and single-member LLCs: The calculation is slightly complex because you must subtract the deductible portion of self-employment tax first. The effective limit is roughly 20% of net profit (not 25%). The IRS provides worksheets in Publication 560.
Simplified example:
- Net self-employment income (Schedule C profit): $100,000
- Deductible half of self-employment tax: roughly $7,065
- Adjusted net income: $92,935
- Maximum SEP contribution (20% effective): roughly $18,587
For S-corp owners paying themselves a salary:
- W-2 salary: $80,000
- Maximum SEP contribution (25% of salary): $20,000
The annual dollar cap for 2025 is $70,000. If 25% of your income exceeds $70,000, your contribution is capped at $70,000.
Minimum and flexibility: There is no minimum contribution. You can contribute $0 one year and the maximum the next. This flexibility is ideal for self-employed people with variable income. Had a great year? Max out the SEP IRA. Slow year? Contribute less or nothing.
Who qualifies
You qualify for a SEP IRA if you have self-employment income from any source:
- Sole proprietorship or single-member LLC
- Freelancing or contract work (1099 income)
- Side business (even if you also have a W-2 job)
- Partnership (each partner can have their own SEP IRA)
- S-corporation or C-corporation
Important: If you have a W-2 job with a 401(k) AND a side business, you can contribute to both your employer’s 401(k) and a SEP IRA for your side business income. The limits are separate. Your 401(k) employee contributions ($23,500) plus your SEP IRA contributions (25% of side business income) can both be maximized, subject to the overall annual additions limit ($70,000 total across all plans for 2025).
How to open a SEP IRA
Step 1: Choose a brokerage. Fidelity, Schwab, and Vanguard all offer free SEP IRA accounts with no annual fees and access to low-cost index funds.
Step 2: Complete IRS Form 5305-SEP. This is a one-page form that establishes your SEP plan. You do not file it with the IRS; you keep it for your records. Most brokerages handle this as part of the account opening process.
Step 3: Fund the account. Transfer money from your business checking account or personal account. You can make contributions anytime during the year, and you have until your tax filing deadline (including extensions) to make contributions for the prior year. File an extension to October 15, and you have until then to fund your SEP IRA for the previous tax year.
Step 4: Invest the money. A SEP IRA is an account, not an investment. Once the money is in, invest it in index funds, target-date funds, or a 3-fund portfolio. The same investment strategies that work in a 401(k) or IRA work in a SEP IRA.
SEP IRA vs. Solo 401(k): the real comparison
The Solo 401(k) (also called Individual 401(k) or Solo-k) is the SEP IRA’s main competitor for self-employed retirement savings. Here is how they compare:
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Max contribution (2025) | Up to $70,000 | Up to $70,000 ($23,500 employee + employer match) |
| Contribution type | Employer only | Employee + employer |
| Roth option | No | Yes (Roth elective deferrals) |
| Loan provision | No | Yes (borrow up to $50K) |
| Setup complexity | Very easy (Form 5305-SEP) | Moderate (plan document required) |
| Annual filing | None (unless assets exceed $250K) | Form 5500-EZ if assets exceed $250K |
| Catch-up contributions (50+) | No | Yes ($7,500 extra) |
| Employees allowed | Yes (must cover all eligible) | No (solo or spouse only) |
| Backdoor Roth impact | Yes (pro rata rule applies) | No (not counted in pro rata) |
When to choose a SEP IRA:
- You want the simplest possible setup with minimal paperwork
- Your self-employment income is high enough that employer-only contributions at 25% reach a meaningful amount
- You do not need a Roth option
- You do not plan to do a backdoor Roth IRA (SEP IRA balances trigger the pro rata rule)
When to choose a Solo 401(k):
- You want to contribute the maximum at lower income levels (the employee contribution of $23,500 is available from dollar one of income)
- You want a Roth option for tax-free growth
- You want the ability to take loans from your retirement account
- You plan to use the backdoor Roth IRA strategy (Solo 401(k) balances do not affect the pro rata calculation)
- You are over 50 and want catch-up contributions
The income crossover point: At roughly $75,000 in net self-employment income, the maximum contribution is similar for both accounts. Below $75,000, the Solo 401(k) lets you contribute more (because of the employee deferral). Above $75,000, the difference narrows. At very high incomes ($280,000+), both accounts reach the same $70,000 cap.
SEP IRA vs. Traditional IRA and Roth IRA
| Feature | SEP IRA | Traditional IRA | Roth IRA |
|---|---|---|---|
| Max contribution | $70,000 | $7,000 | $7,000 |
| Tax deduction | Yes | Yes (income limits apply) | No |
| Tax-free growth | No (tax-deferred) | No (tax-deferred) | Yes |
| Roth option | No | No | Yes |
| Income limits | None | Deduction limits if covered by workplace plan | $161K single / $240K married |
| RMDs | Yes (age 73) | Yes (age 73) | No |
You can have a SEP IRA AND a Roth IRA simultaneously. Many self-employed people use both: the SEP IRA for the large tax deduction, and the Roth IRA for tax-free retirement income. The contribution limits are separate.
Tax strategies for self-employed people
Stack your SEP IRA with other deductions. Self-employment tax (15.3% on the first $168,600 of net income) is the biggest tax burden for freelancers. The SEP IRA reduces your income tax but not your self-employment tax (SE tax is calculated on Schedule SE before the SEP deduction). However, the SEP deduction combined with the qualified business income (QBI) deduction (20% of qualified income) and the deductible half of SE tax can dramatically lower your effective rate.
Contribute by the filing deadline. Unlike a 401(k) where deferrals must happen during the calendar year, SEP IRA contributions can be made until your tax filing deadline. If you file an extension, you have until October 15 of the following year. This gives you time to see your final income numbers before deciding how much to contribute.
Use the SEP IRA to drop a tax bracket. If your self-employment income puts you at $100,000 (22% bracket), a $20,000 SEP contribution drops your taxable income to $80,000, saving $4,400 in federal tax alone. Plan your contribution amount to optimize your bracket.
Common mistakes
Not contributing enough. Many self-employed people open a Roth IRA ($7,000 max) and stop there. If your income supports it, a SEP IRA at $20,000 to $70,000 delivers a far larger tax deduction and retirement nest egg.
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. Consider rolling the SEP IRA into a Solo 401(k) to clear the pro rata issue.
Not investing the contributions. Money deposited into a SEP IRA sits in a money market fund until you invest it. Choose your investments (index funds, target-date fund) immediately after contributing.
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 you contribute for yourself. If you contribute 20% for yourself, you contribute 20% for every eligible employee. This makes the SEP IRA expensive for businesses with multiple employees. A Solo 401(k) or SIMPLE IRA may be better in that case.
Frequently asked questions
Can I have a SEP IRA and a 401(k) at the same time? 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 contribution limit ($23,500) and the SEP IRA limit (25% of self-employment income) are separate, though the total across all plans cannot exceed $70,000 in employer plus employee contributions.
When is the contribution deadline? Your tax filing deadline, including extensions. For most people, that is April 15 or October 15 (with extension) of the year after the tax year. Contribute for 2025 anytime up to October 15, 2026 if you file an extension.
Can I convert a SEP IRA to a Roth IRA? Yes. You can convert SEP IRA funds to a Roth IRA at any time. You will owe income tax on the converted amount. This can make sense if you have a low-income year or want to start a Roth conversion ladder. The converted amount must season for 5 years before penalty-free withdrawal.
Is there a SEP Roth IRA? No. SEP IRAs are Traditional (pre-tax) only. If you want Roth contributions for self-employment income, you need a Solo 401(k) with Roth elective deferrals, or contribute to a separate Roth IRA (up to the $7,000 limit).
Can my spouse contribute to a SEP IRA? Only if your spouse has their own self-employment income. If your spouse works in your business, they can be covered under your SEP plan (you contribute for them as their “employer”). If they have their own separate freelance income, they can open their own SEP IRA.
I have irregular income. Is a SEP IRA still good? Yes, and the flexibility is one of its biggest advantages. Contribute the max in good years and nothing in lean years. There is no required annual contribution.
The bottom line
If you are self-employed and not using a SEP IRA (or Solo 401(k)), you are missing one of the largest legal tax deductions available. A single $25,000 SEP IRA contribution can save you $5,500+ in federal income tax and put that money to work in tax-deferred index fund investments.
The setup takes 15 minutes at Fidelity, Schwab, or Vanguard. There are no annual fees. No complex paperwork. And you have until your tax filing deadline to decide how much to contribute.
If you are just starting your self-employment journey, open a Roth IRA first ($7,000/year) for tax-free growth, then add a SEP IRA once your income supports larger contributions. If you are already earning well, the SEP IRA should be your priority for the tax deduction alone.
Stop paying taxes on money you should be investing. Open a SEP IRA and redirect those tax dollars into your future.
Open a SEP IRA and start saving on taxes