What is a SEP IRA?
If you’re self-employed, run your own business, or juggle freelance gigs, you already know that retirement planning looks different for you. No employer-sponsored 401(k), no matching contributions. It’s just you, your income, and the responsibility to plan for your future. That’s where a SEP IRA can help.
Simplified Employee Pension (SEP) IRA
A SEP IRA, short for Simplified Employee Pension Individual Retirement Account, is a retirement plan designed for self-starters and entrepreneurs. Many of these business owners operate as sole proprietors, meaning they run their business on their own and report income and expenses on their personal tax return without forming a separate legal entity. This setup allows them to take full advantage of a SEP IRA, which provides a way to save significantly more than traditional options allow.
Let’s walk through how it works and whether it might be the right fit for your retirement goals.
SEP IRA, Simplified
At its core, a SEP IRA is a retirement savings account that allows business owners and self-employed individuals to make tax-deferred contributions, meaning you don’t pay taxes on the money you contribute until you take qualified withdrawals in retirement, typically after age 59½.
Here’s the key difference compared to a Traditional or Roth IRA: only the employer can contribute to a SEP IRA. If you’re self-employed, you’re both the boss and the employee, so you’re essentially contributing to your own account.
For 2025, you can contribute up to 25% of your net earnings from self-employment, up to a maximum of $70,000. That’s a huge leap from the $7,000 limit (or $8,000 if you’re 50 or older) on regular IRAs.
Who's Eligible for a SEP IRA?
For Business Owners:
- Any business structure works: sole proprietorships, partnerships, LLCs, S-Corps, or C-Corps
- Self-employed individuals with earned income from their business
- Business owners with or without employees
For Employees (if you have them):
Your business must include any employee who:
- Is age 21 or older
- Has worked for your business in at least 3 of the last 5 years
- Earned at least $750 in compensation from your business in 2025 ($650 in 2024)
Who's Not Eligible for a SEP IRA?
According to IRS rules:
- Employees under age 21
- Employees who haven’t worked at least 3 of the last 5 years
- Employees who earned less than $750 in 2025
- Individuals without net earnings from self-employment (for owner contributions)
Important: You can make it easier for employees to qualify for your SEP IRA plan, but not harder. If you contribute to your own SEP IRA, you must contribute the same percentage for all eligible employees if you have employees.
Calculating Your Maximum Contribution
Other types of income, such as investment income, rental income, or payments from side jobs that aren’t part of the SEP plan, do not count toward your contribution limit.
SEP IRA contribution limits are based on your compensation. For W-2 employees, this means the wages you earn from the employer offering the plan. For self-employed individuals, it is your net earnings from your business. Other types of income, such as investment income, rental income, or payments from side jobs that aren’t part of the SEP plan, do not count toward your contribution limit.
Because the IRS uses different rules to figure “compensation” for W-2 employees and self-employed individuals, we’ve separated the limits for each group below.
W-2 Employees
You can contribute up to $70,000 or 25% of your adjusted compensation in 2025, whichever is less.
Self-Employed Individuals
For self-employed individuals, the IRS uses a special calculation to figure out your compensation for SEP IRA purposes. In this case, your compensation is your net earnings from self-employment, minus:
- One-half of your self-employment tax, and
- The amount you contribute to your own SEP IRA.
This adjusted figure is what your SEP IRA contribution limit is based on.
Helpful tip: Because your contribution also reduces your compensation, the math works out so that your maximum contribution is effectively about 20% of your net business income before adjustments. This is a commonly used estimate to simplify planning.
Key Deadlines
- Set-up deadline: You must establish your SEP IRA by your business’s tax filing deadline (including extensions) to make contributions for that year.
- Contribution deadline: Contributions are due by your business tax filing deadline, including extensions.
Note for most businesses: This deadline usually falls on April 15 of the following year, unless you've filed for an extension.
How SEP IRAs Support Business Owners
1. It’s Typically Simple To Set Up And Maintain
Setting up a SEP IRA involves less paperwork than other retirement plans, and setting one up is as simple as filling out an online form.
2. It Can Scale With Your Business
Had a good year? If so, you can decide to save more. If you’ve had a tough year, you can put in less. A SEP flexes with you. Unlike other plans that need regular contributions like a 401(k), a SEP IRA lets you adjust your contributions based on how much you earn.
3. It Can Help Reduce Your Current Tax Burden
Your contributions are tax-deductible, which can lower your taxable income for the year. Plus, the money grows tax-deferred until you take it out in retirement.
A SEP IRA in Action
Let’s say you’re a freelance graphic designer earning $100,000 a year. With a SEP IRA, you could contribute up to 25% of your net earnings from self-employment, which might allow you to put away tens of thousands of dollars while reducing your taxable income.
In comparison, a Traditional IRA limits annual contributions to $7,000 ($8,000 if you’re over 50), making SEP IRAs a much higher-contribution option.
Ideal For:
- Freelancers, gig workers, and self-employed individuals who don’t have access to a workplace retirement plan
- Small business owners looking for a straightforward way to contribute to their own retirement plan
- Self-employed individuals with variable income who want the option to contribute more in high-income years and less during slow periods.
Not Ideal For:
- People seeking tax-free withdrawals: SEP IRAs are funded with pre-tax dollars, so distributions are taxed as ordinary income. Those who want tax-free withdrawals might consider a Roth IRA instead.
- Those 50+ who want to make catch-up contributions: SEP IRAs don’t allow catch-up contributions.
- Businesses with multiple employees: SEP IRAs can be more complicated when covering multiple employees, making them less ideal for larger businesses.
Important Considerations Before Choosing a SEP IRA
Equal Treatment (If you Have Employees)
If you have eligible employees, you’re required to contribute the same percentage of their compensation as you do for yourself. That can add up quickly if your team grows.
No Roth Option:
All SEP IRA contributions are pre-tax only. If you want tax-free growth and withdrawals in retirement, you'll need a separate Roth IRA (subject to income limits).
No Catch-Up Contributions:
Unlike Traditional and Roth IRAs, there's no extra $1,000 contribution allowed for people 50 and older. This likely matters less because you can contribute exponentially more.
What Else To Know:
- Early withdrawal penalties apply before age 59½
- Required Minimum Distributions (RMD) begin at age 73
Be Retirement Confident.
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Get startedIs a SEP IRA Right for You? PensionBee Can Help
A SEP IRA can be a powerful retirement tool, especially if you’re self-employed and want to save more than a standard IRA typically allows. It can also be a smart option for business owners who want retirement benefits without the complexity and cost of a full 401(k) plan.
If you want a straightforward, flexible way to save more with higher contribution limits on your own terms, PensionBee’s SEP IRA (available exclusively for sole proprietors) could be the retirement solution your business needs. You can start fresh to enjoy tax-advantaged savings and even roll over your old retirement accounts, like 401(k)s or IRAs, all into one place. This gives you a clear view of your savings and can help you confidently plan your next steps. Plus, our dedicated account managers, called BeeKeepers, guide you every step of the way, so you can focus on growing your savings and preparing for the retirement you deserve.
Professional Investment Management: The PensionBee Advantage
Unlike most SEP IRA providers that leave you to manage investments on your own, PensionBee offers five investment portfolios built with ETFs powered by State Street, so you can benefit from institutional expertise without the complexity.
Five Expert-Built Portfolios:
This means instead of spending time researching investments, rebalancing portfolios, and managing multiple accounts, you can focus on growing your business while your retirement savings are professionally managed.
Frequently Asked Questions
1. What is a SEP IRA and who is it designed for?
A Simplified Employee Pension (SEP) IRA is a retirement plan specifically designed for self-employed individuals and small business owners. SEP IRAs are particularly beneficial for sole proprietors, freelancers, and independent contractors looking for a retirement plan with higher contribution limits and simpler administration than traditional employer plans.
2. What do I need to know about contributions?
If you're a sole proprietor with no employees, you can contribute up to $70,000 or 25% of your adjusted compensation in 2025, whichever is less.
For self-employed individuals, the IRS uses a special calculation to figure out adjusted compensation. In this case, your adjusted compensation is your net earnings from self-employment, minus:
- One-half of your self-employment tax, and
- The amount you contribute to your own SEP-IRA.
- This adjusted figure is what your SEP IRA contribution limit is based on.
(Note: Because your contribution also reduces your compensation, the math works out so that your maximum contribution is effectively about 20% of your net business income before adjustments. This is a helpful shortcut when estimating how much you can contribute.)
For Example: If you're a sole proprietor with $200,000 in net business income for 2025, your SEP IRA contribution won’t be a straight 25% of that amount.
The IRS requires you to first adjust your income by subtracting:
- Half of your self-employment tax, and
- The SEP contribution itself.
After using the IRS formula, your adjusted compensation comes out lower, so your maximum SEP IRA contribution would be around $40,000—which is roughly 20% of your original net income.
That’s still significantly more than the $7,000 contribution limit for a Traditional IRA, and it's a useful way for self-employed individuals to boost retirement savings.
3. Why do I need to complete a Form 5305?
Form 5305-SEP is required to establish your Simplified Employee Pension (SEP) plan with the IRS. This IRS form serves as the basic legal document for your SEP IRA, outlining eligibility requirements and contribution formulas. While you don't file this form with the IRS, you must complete it, sign it, and keep it with your business records.
4. Can I have both a SEP IRA and a Traditional/Roth IRA?
Yes, you can contribute to both a SEP IRA and a Traditional or Roth IRA in the same year.
However, each account has its own contribution limit:
- For SEP IRAs: Employers can contribute up to 25% of your compensation or $70,000 for 2025 (whichever is less).
- For Traditional and Roth IRAs: You can contribute up to a combined total of $7,000 ($8,000 if you're 50 or older) in 2024.
Keep in mind, your ability to deduct Traditional IRA contributions or contribute to a Roth IRA depends on your income and whether you're considered covered by a retirement plan at work and yes, a SEP IRA does count as such a plan.
5. What if I hire employees after setting up my SEP IRA?
You must include all eligible employees in your SEP IRA plan and contribute the same percentage of their compensation as you do for yourself.
6. Can I skip contributions in some years?
Yes, SEP IRA contributions are completely flexible. You can contribute different amounts each year or skip years entirely based on your business performance.
7. What happens if I over-contribute?
Excess contributions are subject to a 6% penalty tax each year until corrected. Contact your SEP IRA provider immediately to correct over-contributions.
8. How is a SEP IRA different from a Traditional IRA or a Roth IRA?
SEP IRAs have much higher contribution limits ($70,000 instead of $7,000 for other IRAs), which can make them a good choice for self-employed workers. Additionally, Traditional IRAs are funded with pre-tax dollars, while Roth IRAs are funded with after-tax dollars, offering tax-free growth and withdrawals under certain conditions. SEP IRAs have similar tax treatment to Traditional IRAs.
9. When do Required Minimum Distributions (RMD) begin?
Just like with Traditional IRAs, SEP IRAs also come with Required Minimum Distributions or RMDs for short. That means once you hit a certain age (usually 73), you’ll need to start taking a minimum amount out of your account each year. Why? The IRS wants to make sure those tax-deferred savings eventually get taxed, so you can’t leave the money growing in your account forever. Missing an RMD can lead to penalties, so it’s important to know when you’re required to take one and how much to withdraw.
10. How do withdrawals work?
Withdrawals from a SEP IRA are taxed as ordinary income in retirement. You can begin taking withdrawals penalty-free at age 59½. If you withdraw funds before that age, you may face a 10% early withdrawal penalty, in addition to ordinary income taxes. Required Minimum Distributions (RMDs) must start at age 73.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.
