Wealthy Habitat

The landscape · Self employed and owners

The SEP IRA

A SEP IRA is a retirement plan where only the business contributes, as a percent of each eligible person's pay, into IRAs that belong to the workers.

Who this exists for. This exists for a self employed person or a small business owner who wants a retirement plan funded by the business with almost no paperwork. Ticks that show it: I earn money on my own (freelance, gig, side work); I own a business with revenue.

How it works

The business adopts the plan with a short IRS form and opens a SEP IRA for the owner and for every eligible employee. Each year the business chooses a percent of pay, from zero up to this year's official sep ira contribution percent (not yet verified here; see the official source below) percent, and must contribute that same percent for everyone eligible, capped per person at $72,000 (2026, verified on the official page). For a sole proprietor the percent applies to net self employment earnings after the deduction for half of self employment tax, which makes the effective rate on gross profit lower, close to 20 percent at the top rate. The contribution is deductible to the business, vests at once, and can be made until the business tax filing deadline including extensions. There are no employee deferrals in a SEP, no catch up, and no loans.

What it gives

Setup takes a form and an account, with no yearly filing to the government.

The percent can change every year, including zero in a lean year.

The contribution deadline runs to the extended filing date, so the amount can be set after the books are closed.

What it costs, or where the catch is

Every eligible employee gets the same percent as the owner, which gets expensive with staff.

There is no employee deferral, so a low profit year leaves little room compared with a solo 401(k).

The SEP balance counts in the pro rata pool and complicates a backdoor Roth.

A worked example

Bea is a freelance designer with $90,000 of net profit. After the deduction for half of her self employment tax her base is about $83,640, and at the top SEP rate her contribution works out near 20 percent of net profit, about $16,700. At a 24 percent rate the deduction saves $16,700 times 0.24, about $4,000 in federal tax, and the full $16,700 goes into her SEP IRA.

Where it goes wrong

The common miss is hiring a first employee and forgetting that the plan now has to contribute the owner's percent for that person too.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 560, Retirement Plans for Small Business. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.

Ask about The SEP IRA

A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.

Nearby doors

  • The health savings account

    This applies when a person is covered by a qualifying high deductible health plan and has no other disqualifying coverage, which opens the door to a health savings account.

  • The traditional IRA and the deduction phase out

    This exists for anyone with earned income who opens an IRA on their own, and especially for a worker who also has a plan at work, since that changes whether the contribution is deductible.

  • The Roth IRA and its income phase out

    This exists for anyone with earned income below the Roth income lines who wants an account where qualified withdrawals come out tax free.

  • The backdoor Roth and the pro rata rule

    This exists for a person whose income is above the Roth IRA phase out and who has no pretax money in any traditional IRA.

  • The spousal IRA

    This exists for a married couple filing jointly where one spouse has little or no earned income and the other spouse earns enough to cover both contributions.

  • IRA catch up at 50

    This applies when a person who contributes to a traditional or Roth IRA turns 50 during the year, which adds a catch up amount to the yearly cap.

Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.