What is a SEP IRA

SEP IRAs offer business owners and self-employed individuals flexible, employer-funded retirement savings with high contribution limits and tax advantages.

Designed for business owners and self-employed individuals, Simplified Employee Pension Individual Retirement Accounts (SEP IRAs) are generally simple to set up and administrate.
Contributions to a SEP IRA are tax-deductible, grow tax-deferred, and the amount and timing of contributions are flexible.
In 2025, the contribution limit is up to 25% of compensation or $70,000, significantly higher than traditional IRAs.
SEP IRAs require equal percentage contributions for all eligible employees and allow only employer contributions, not employee deferrals.
SEP IRAs are best suited for small businesses or individuals without many employees, and may not be ideal if employee participation or catch-up contributions are required.

If you’re a business owner or a self-employed individual, a SEP IRA might be exactly what you need to enhance your retirement savings. A SEP IRA offers high contribution limits, significant tax advantages, and minimal administrative hassle.

Let’s explore how this retirement savings option works, so you can determine if it’s a good fit for you as an entrepreneur or business owner.

What Is a SEP IRA?

A SEP IRA is a specialized retirement account designed for business owners and self-employed individuals. Many IRAs require individuals to make contributions. The key difference is that SEP IRAs are entirely employer-funded accounts.

That means only you, as the business owner, make the contributions. If you establish a SEP IRA, all eligible employees (including you) must have one.

While they follow many of the same investment and distribution rules as traditional IRAs, SEP IRAs offer tax-advantaged investments with significantly higher contribution limits. They are available to various business structures, including sole proprietorships, partnerships, limited liability companies, S corporations, and C corporations.

SEP IRA Benefits

The beauty of a SEP IRA lies in its simplicity. There are no complex compliance requirements, annual IRS filings, or mandatory contributions. You have complete control over when and how much to contribute, making it ideal for businesses with variable income.

Tax Advantages

Every dollar you contribute to a SEP IRA is tax-deductible, directly reducing your current year's taxable income.

For example, if you earn $60,000 and contribute $15,000 to your SEP IRA, your taxable income drops to $45,000. Depending on how much you contribute, you could save thousands of dollars on taxes.

Your contributions grow tax-deferred until retirement, meaning you won't pay taxes on investment gains along the way. This tax-deferral advantage allows your money to compound more effectively over time.

Furthermore, business owners who establish SEP IRAs may qualify for a tax credit. If you have 100 or fewer employees who receive at least $5,000 in compensation, you can earn a tax credit of up to $5,000 per year for the first three years.^[1]

High Contribution Limits

SEP IRAs truly shine due to their high contribution limits. The 2025 SEP IRA contribution limits allow you to deposit up to 25% of your compensation or $70,000, whichever is less.^[2] Compare that to traditional IRA limits of just $7,000 ($8,000 if you're 50 or older), and you can see why SEP IRAs are so attractive to high earners.

The compensation calculation is based on the first $350,000 of your annual earnings for 2025. If you're self-employed, you can contribute up to 25% of your net self-employment earnings, subject to the annual dollar limit.

This contribution capacity makes SEP IRAs particularly valuable for successful professionals and business owners looking to catch up on retirement savings.

Flexibility and Ease of Administration

SEP IRAs require virtually no ongoing administration. There are no annual IRS filings, complex compliance testing, or mandatory employee disclosures. Setting up a SEP IRA typically involves completing just one form — IRS Form 5305-SEP.

You also have complete flexibility in contribution timing and amounts. Contributions aren't required every year, and you can adjust your contribution percentage annually based on your business's cash flow. This flexibility is particularly valuable for seasonal businesses or those with unpredictable revenue streams.

Even better, you can establish a SEP IRA as late as your business tax filing deadline, including extensions. This means you could potentially set up and fund a SEP IRA all the way into October of the following year.

Considerations Before Choosing a SEP IRA

SEP IRA eligibility requirements are straightforward, but they must be applied uniformly to all employees. To be eligible, employees must:

Be at least 21 years old
Have worked for you in at least three of the last five years
Have earned at least $750 from your business during the year (for 2025)

An important rule toremember is that if you have eligible employees, you must contribute the same percentage of compensation for everyone, including yourself. For example, if you contribute 20% of your revenue to your SEP IRA, you must contribute 20% for every eligible employee as well.

This requirementmay become expensive as your team grows.

Comparison with Other Retirement Accounts

SEP IRA vs. Traditional IRA: While both offer tax-deferred growth, SEP IRAs provide much higher contribution limits and are employer-funded rather than individually funded. Traditional IRAs are often a better choice for individuals who don't make self-employment income.

SEP IRA vs. 401(k): 4 01(k) plans allow both employer and employee contributions, with total limits of $70,000 for 2025. These retirement plans offer plenty of potential for employee savings, but they're complicated to administer. They also require annual filings and regular compliance checks.

If you have a large business with many employees, you may prefer to offer a 401(k) plan.

SEP IRA vs. SIMPLE IRA: SIMPLE (Savings Incentive Match Plan for Employees) IRAs allow employee contributions up to $16,500 for 2025 (or up to $19,500 for employees over 50) and require mandatory employer contributions. SEP IRAs offer higher employer contribution limits but don't allow employee participation.

Key Limitations to Consider

Several limitations may impact whether a SEP IRA is right for you:

No employee contributions allowed; only employers can fund accounts
No catch-up contributions for those age 50 and older
The equal percentage requirement can be expensive with many employees
Limited Roth options; most providers offer only traditional, pre-tax accounts
No loans are permitted, so you can't borrow against your SEP IRA balance

Is a SEP IRA the Right Choice for You?

A SEP IRA can be an excellent choice for self-employed individuals, freelancers, and small business owners with few employees. They can provide an ideal combination of tax benefits, high contribution limits, and administrative ease.

The decision depends on your business structure, employee count, income level, and retirement savings goals. Consider consulting with a financial advisor or tax professional to determine if a SEP IRA aligns with your specific circumstances and long-term financial objectives.

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Is a SEP IRA Right for You? Key Points to Consider