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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 $70,000 in 2025 — with 15 minutes of setup, no complex paperwork, and a massive 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).
A SEP IRA lets you contribute up to 25% of your net self-employment income, with a maximum of $70,000 in 2025. That is significantly more than the $7,000 annual limit on a Traditional or Roth IRA and competitive with a 401(k). The setup takes 15 minutes. The paperwork is minimal. The tax deduction is massive.
- The effective SEP IRA contribution limit for sole proprietors is approximately 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 contribution is roughly $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) simultaneously. If you have a W-2 job with a 401(k) plus self-employment income, your 401(k) employee contributions ($23,500) and SEP IRA contributions (25% of side business income) are separate limits — both can be maximized subject to the $70,000 overall limit across all plans.
- The SEP IRA contribution deadline is your tax filing deadline including extensions. If you file a tax extension to October 15, you have until October 15 to fund your SEP IRA for the previous tax year. This is unique among retirement accounts and gives you time to see final income numbers before committing to a contribution amount.
- SEP IRA balances trigger the pro rata rule if you also want to do a backdoor Roth IRA conversion. If the backdoor Roth is part of your strategy, consider a Solo 401(k) instead — Solo 401(k) balances do not count in the pro rata calculation, making the backdoor Roth cleaner.
- There is no minimum annual contribution required. You can contribute the maximum one year and nothing the next. This flexibility is ideal for self-employed people with variable income — unlike a Solo 401(k) where employee deferrals must be designated before year-end.
Calculate your maximum SEP IRA contribution
SEP IRA Contribution Calculator
See your maximum contribution and tax savings based on your self-employment income.
How a SEP IRA works
A SEP IRA is a Traditional IRA with dramatically 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. All SEP IRA contributions are employer contributions. This means no employee deferral elections are required — you simply decide the contribution amount at any point 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 a $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 incur income tax plus 10% penalty.
Required Minimum Distributions start at age 73. Same as Traditional IRA rules.
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. File an extension to October 15 and you have until October 15 of the following year to fund your SEP IRA for the prior tax year.
This means you can wait until your income is finalized — and even until after April 15 — before deciding how much to contribute. You calculate your exact profit on your tax return, then write one check for the maximum allowable SEP contribution.
SEP IRA vs Solo 401(k)
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Max contribution (2025) | Up to $70,000 | Up to $70,000 ($23,500 employee + employer) |
| At low income levels | Lower (25% only) | Higher ($23,500 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 ($7,500 extra) |
| 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 |
Choose SEP IRA if: You want the simplest possible 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.
Choose Solo 401(k) if: You want to maximize contributions at lower income levels (the $23,500 employee deferral is available from the first dollar of income), you want a Roth option, you plan to use the backdoor Roth IRA 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) typically allows a higher contribution because of the employee deferral component. Above $75,000, the difference narrows and both approaches reach the same $70,000 cap at high income levels.
How to open a SEP IRA in 3 steps
- Choose a brokerage. Fidelity, Schwab, and Vanguard all offer free SEP IRA accounts. The account opening 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. Most brokerages handle this as part of the account opening process.
- Fund and invest. Transfer money from your business or personal checking account. Then invest the funds — a SEP IRA is an account, not an investment. Choose low-cost index funds, a target-date fund, or a 3-fund portfolio identical to what you would use in a 401(k) or IRA.
Common mistakes
Opening only a Roth IRA and stopping there. Many self-employed people open a Roth IRA ($7,000 max) and think they are done. If your income supports it, a SEP IRA at $15,000 to $70,000 delivers a far larger tax deduction and retirement nest egg. Both accounts can and should be used simultaneously.
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 partially taxable. Solution: roll the SEP IRA into a Solo 401(k) to clear the pro rata 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 immediately after contributing — do not let cash sit 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 you contribute for yourself. Contributing 20% for yourself means contributing 20% for every eligible employee — this can become very expensive. A Solo 401(k) or SIMPLE IRA is usually better for businesses with multiple employees.
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 simultaneously. The 401(k) employee contribution limit ($23,500) and the SEP IRA limit (25% of self-employment income) are separate, though the total employer contributions across all plans cannot exceed $70,000. Example: W-2 job with $23,500 in 401(k) contributions + $15,000 SEP IRA from your freelance income = $38,500 in combined retirement contributions in one year. Both the 401(k) contributions and the SEP IRA contributions are fully deductible.
When is the SEP IRA contribution deadline?
Your tax filing deadline including extensions. For most people, that is April 15. If you file an extension, the deadline extends to October 15 of the year after the tax year. This means you can make 2025 SEP IRA contributions as late as October 15, 2026 if you file a tax extension. This is a significant advantage over 401(k) employee deferrals, which must be made during the calendar year. You can wait until your income is finalized before deciding your contribution amount.
Can I convert a SEP IRA to a Roth IRA?
Yes. You can convert SEP IRA funds to a Roth IRA at any time. The converted amount is treated as ordinary income in the year of conversion, and you owe income tax on it. This can make sense if you have a low-income year (lower tax bracket = lower conversion cost) or if you want to start a Roth conversion ladder for early retirement. The converted amount must meet the Roth IRA 5-year seasoning requirement before qualified penalty-free withdrawal. Strategically, doing SEP-to-Roth conversions in years with lower income than normal is a common tax optimization approach for self-employed people with variable earnings.
Is there a SEP Roth IRA?
No. SEP IRAs are Traditional (pre-tax) only — there is no Roth version. If you want Roth contributions for self-employment income, you have two options: (1) a Solo 401(k) with Roth elective deferrals (allows up to $23,500/year in Roth contributions from self-employment income), or (2) a separate Roth IRA with direct contributions up to the $7,000 limit (if your income falls within Roth IRA eligibility thresholds) or through a backdoor Roth conversion. Many self-employed people use a SEP IRA for the large pre-tax deduction plus a Roth IRA for the tax-free growth — getting the best of both structures.
I have irregular self-employment income. Is a SEP IRA still a good choice?
Yes — the flexibility is one of its biggest advantages for variable-income earners. There is no required minimum contribution. You can contribute the maximum in an excellent year and zero in a slow year without any plan fees or penalties. This is fundamentally different from a Solo 401(k) where employee deferral elections should technically be made before year-end, and from a SIMPLE IRA which requires regular contributions. For a freelancer with unpredictable income, the SEP IRA’s open-ended contribution structure (contribute whatever you can afford, up to the max, before the tax deadline) is practically ideal.
What happens to my SEP IRA if I get a full-time job with a 401(k)?
Nothing automatic happens. Your existing SEP IRA stays open and continues to grow tax-deferred. You can no longer make new SEP contributions unless you have self-employment income on the side (freelance, consulting, side business). If you want to consolidate accounts, you can roll the SEP IRA into your new employer’s 401(k) (if the plan accepts rollovers) or into a Traditional IRA. Important: if you plan to do backdoor Roth conversions in your new W-2 job situation, the SEP IRA balance will trigger the pro rata rule. Rolling it into the employer’s 401(k) removes it from the pro rata calculation and makes the backdoor Roth clean again.
How does the SEP IRA affect my Social Security benefits?
SEP IRA contributions reduce your taxable income but do not reduce your self-employment tax, which is what funds Social Security credits. Your SE tax (15.3%) is calculated on your net self-employment income before the SEP deduction. So making a large SEP IRA contribution does not reduce your Social Security credits or future benefits — you still pay SE tax on the full net profit, and those payments still count toward your 40-credit eligibility and benefit calculation. This is one of the underappreciated features of the SEP IRA: it reduces income tax without reducing the Social Security earnings record that determines future retirement benefits.
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 $20,000 SEP IRA contribution saves you roughly $4,000 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 tax savings. Open at Fidelity, Schwab, or Vanguard — free account, 15 minutes, no annual fees.
Related reading:
- Comparing SEP IRA vs Solo 401(k) for your specific income? Read our 401(k) maximization guide — covers the Solo 401(k) employee deferral structure in detail.
- Planning to do a backdoor Roth alongside your SEP IRA? Read our backdoor Roth guide — the pro rata rule and how to handle pre-existing IRA balances.
- Targeting early retirement with your self-employment savings? Read our Roth conversion ladder guide — how to access pre-tax retirement funds penalty-free before age 59.5.
