SEP IRA Guide: Rules, Benefits, and Contributions Explained

• A Simplified Employee Pension (SEP) IRA is a retirement plan that business owners and self-employed persons can establish.
• Employers can contribute 25% of an employee's annual compensation to a SEP IRA, or $70,000 for 2025, whichever is less.
• SEP IRA contributions can only be made by employers, and the amount must be equal for all workers.

While many employers offer their employees access to a retirement plan like a 401(k), not everyone has that option. But that doesn't mean you're out of luck when it comes to saving for retirement.

If you own a business, are self-employed, or are earning freelance income, a Simplified Employee Pension (SEP) IRA is one of the best retirement plans to help boost your nest egg in 2025.

While there are some similarities among different types of retirement accounts, each has its own rules regarding contribution limits, distributions, rollovers, and investment options. So, in this guide, we'll walk you through the most important things to know about how a SEP IRA works, how to open a SEP IRA, SEP IRA contribution limits in 2025, and more.

What is a SEP IRA?

Self-employed retirement plans like SEP IRAs are retirement savings accounts for small business owners and self-employed individuals. They’re one of the best retirement plans for long-term wealth building.

SEP IRA rules permit employers to create and contribute funds into a SEP IRA for both themselves and all eligible employees. Investments in a SEP IRA grow tax-deferred until withdrawn in retirement.

Unlike traditional IRAs, which have a baseline annual contribution limit of $7,000, SEP IRAs have higher contribution limits and may be a good addition to your retirement plan. Even if you're not self-employed, you could benefit from a SEP IRA, but the decision is out of your hands. Instead, all contributions need to come from the employer.

Note: If an employer contributes more than the annual limit to a SEP IRA, they can follow IRS guidelines to correct it, which includes a self-correction program that might be able to be used for insignificant mistakes.

SEP IRA contribution limits 2025

Employers can contribute the lesser of 25% of the employee's annual compensation or $70,000 toward a SEP IRA in 2025 (up from $69,000 in 2024). Employees can not make any contributions themselves. So if you're self-employed, your business essentially makes a contribution to your own SEP IRA, which counts as a business expense rather than going toward your taxable income.

Note, however, that limits differ slightly if you're self-employed and making SEP IRA contributions into your own account. You still can only contribute the lesser of 25% of compensation or $70,000, but figuring out that compensation amount is based on net earnings minus what you contribute to your own SEP IRA and half of your self-employment tax. The math can get a little tricky, but you can find calculators online or through tax software to figure out your maximum allowed contribution.

Also, contributions made to a SEP IRA must be equal for all employees. For example, if an employer contributes 20% of employee A's salary toward a SEP IRA, the employer must contribute the same percentage to all other employees. To that point, if you fund your own SEP IRA as a business owner and have employees, then whatever percentage you choose for yourself has to apply to other employees too.

"But the employer can change the contribution percentage each year and can even opt to pause contributions one year, for instance, if the company is struggling financially," says Chirag Chauhan, CFP, LPL financial advisor and managing partner at Bluff City Advisory.

In fact, there's a lot of timing flexibility; as long as contributions are made before the business's tax-filing deadline, they can count for the previous year. So, you might contribute 1% of compensation in January, 5% in June, and then the following April, right before the deadline for the preceding taxable year, you could determine the percentage you can afford to contribute.

SEP IRA vs Roth IRA vs traditional IRA

A SEP IRA is centered on employer contributions into a retirement account, whereas a Roth IRA and traditional IRA are based on individual contributions. For example, a self-employed individual with a SEP IRA makes contributions that are deducted as a business expense, whereas a Roth IRA contribution comes from post-tax dollars and a traditional IRA contribution counts as a regular income tax deduction, not a business expense.

A SEP IRA also has much higher contribution limits — you can contribute the lesser of 25% of annual compensation or $70,000 to a SEP IRA, vs. $7,000 (+$1,000 if age 50 and up) per year into a Roth or traditional IRA.

Absolutely! Here's a table summarizing the key differences between SEP IRAs, Roth IRAs, and Traditional IRAs:

How SEP IRAs work

Setting up a SEP IRA is fairly simple, and SEP IRAs work similarly to traditional IRAs when it comes to rollovers, distribution, and investing options.

The initial steps to set up a SEP IRA include creating a written agreement about the plan and providing information on it to employees, if applicable. If contributing to your own retirement, you would then set up your own SEP IRA account under the plan and provide instructions to employees on how to open their accounts under your plan's framework, before you as the employer then starts contributing to the accounts.

Employers make contributions to SEP IRA accounts, which are tax deductible for the business. Employees (or the self-employed person) generally do not declare these contributions as income. The invested funds can then grow tax-deferred until withdrawn in retirement, which is then taxed as ordinary income, just like traditional IRA rules.

However, a big exception is that due to the SECURE 2.0 Act in 2022, employers can offer employees (or themselves if self-employed) the option to make SEP IRA contributions into a Roth IRA. In that case, the contributions are not tax deductible and instead count as employee income. The benefit, though, is that funds can later be taken out tax-free in retirement.

How to open a SEP IRA

Opening a SEP IRA is fairly simple. The IRS has some basic requirements, like providing a written agreement about the plan to all eligible employees and providing information to them, like on how contributions will be allocated. You may be able to use IRS Form 5305-SEP as the written agreement for the plan (but you don't file this with the IRS), or you can use a different model, like one provided by a financial institution.

In terms of actually opening a SEP IRA for yourself, you can do so with most major brokerage firms like Vanguard, Fidelity, and Charles Schwab. These financial institutions can walk you through the process, but it generally just involves some basic account opening paperwork and connecting a funding source. If you have employees, they can then open their own accounts under your SEP IRA framework with this financial institution, you'll just need to direct them to the appropriate account opening paperwork.

SEP IRA investment options

Funds in a SEP IRA can be invested in various ways, much like how traditional IRAs give a lot of investment flexibility. Specific investment options vary by account provider, but typically, you can invest in a wide range of stocks, bonds, ETFs, mutual funds, and other securities, much like you can in a regular brokerage account.

The employer is not responsible for making investment decisions. Instead, the employer chooses which brokerage to set up the accounts with, and then the individual account owners (the employees) make investment decisions.

SEP IRA pros and cons: Is it the right account for you?

Like any other financial product, a SEP IRA has both benefits and drawbacks, depending on your situation and perspective. Some of the top SEP IRA pros and cons include:

SEP IRA tax advantages

SEP IRAs have some notable benefits, including tax advantages and higher contribution limits compared to some other IRA plans. In general, the tax advantages follow those for traditional or Roth IRAs, depending on how the SEP IRA is set up. Usually, though, SEP IRA contributions go into a traditional account structure, meaning you're not taxed on the initial contributions, which can grow without incurring taxes until withdrawal. Generally, SEP IRA funds can be withdrawn starting at age 59 ½, with withdrawals then taxed as ordinary income.

By being able to put more money each year into a SEP IRA than a traditional IRA, though, the tax advantages of SEP IRAs can become very significant over time.

Note that while you can take distributions from your SEP IRA anytime, early withdrawals incur a 10% tax penalty in addition to ordinary income tax. These accounts also have required minimum distributions (RMDs) once you turn age 73.

SEP IRA vesting

For employees, another significant benefit of a SEP IRA is that they will instantly be fully vested, rather than how some retirement plans vest employer contributions over several years.

"SEP IRAs are always immediately vested, which means 100% of the account belongs to the employee," says Chirag. "SEP IRAs have no vesting schedule, which is a plus for the employee."

SEP IRA eligibility criteria

You don't have to own a large business to start a SEP IRA. In fact, these are often preferred by small business owners, solopreneurs, or even those with a side hustle, even if there's no LLC set up. Since employers have to make equal contributions to employees if using a SEP IRA, that can get expensive if you're trying to save for your own retirement while also supporting your employees, thus why many one-person businesses use SEP IRAs.

That said, the baseline criteria for SEP IRA eligibility, either for employees or self-employed individuals, is that they are at least 21 years old, made at least $750 in 2023 and 2024 (lower requirements if counting pre-2023), and have worked for your employer (or be self-employed) for at least three of the previous five calendar years.

Some exceptions, however, are that employers might not have to include union members covered by other retirement benefits, nor do they have to include nonresident employees who don't receive U.S. compensation from the employer.

That said, an employer can loosen these restrictions if they want, but they can't make them more restrictive. In other words, if an employer is willing to pay into more employees' accounts, they can, but they can't change the baseline IRS rules to prevent certain employees from participating.

The bottom line on SEP IRAs

Overall, a SEP IRA is a great retirement savings plan for self-employed people and small businesses with few employees. The plan allows you to set aside a considerable amount of money per year toward your retirement — perhaps around 10 times as much as a traditional IRA. Being able to contribute so much while getting an upfront tax deduction for the business and letting the funds grow tax-deferred until withdrawn in retirement can be a significant boost for your retirement. Just make sure you fully understand what's involved with setting up and managing these accounts, especially if you have employees.

If you still need more information about SEP IRAs, consider talking to a financial consultant or advisor.

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Frequently asked questions about SEP IRAs

What is the downside of a SEP IRA?

There are several potential disadvantages of a SEP IRA. One is that employers have to make equal percentage-based contributions to employees, so a small business owner might not be able to afford their own SEP IRA contributions plus those for employees. Another downside is that only employers can make contributions, not employees.

Who is a SEP IRA best for?

A SEP IRA is often best for small business owners and self-employed individuals, including those with side income while working another job. However, much depends on your circumstances, such as your profit and financial goals.

Can I have both a SEP IRA and a 401(k)?

Yes, an individual can have both a SEP IRA and a 401(k) if the accounts come from separate employers. For example, you might have a 401(k) from your full-time job and establish a SEP IRA to save more from your side hustle.

How does a SEP IRA compare to a Solo 401(k)?

Both SEP IRAs and solo 401(k)s are popular self-employed retirement plans. Some of the main differences are that solo 401(k)s have higher contribution limits than SEP IRAs, but they typically come with higher administrative burdens. Also, a solo 401(k) can only be used if you don't have any employees besides your spouse.

Should you open a SEP IRA?

The ability to save pre-tax money and set up a retirement plan for your business and employees makes it an appealing option for many sole proprietors and small business owners. A SEP IRA has higher contribution limits than a traditional IRA and allows you to invest in various assets, which can vary by account provider.

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