What Is a SEP IRA?

How Does a SEP IRA Work?

A SEP IRA is a tax-advantaged individual retirement account that lets business owners contribute toward their employees' retirement as well as their own. SEP IRA contributions are tax-deferred, which means business owners and self-employed people can deduct SEP contributions on their tax returns. As with traditional IRA or 401(k) funds, SEP IRA distributions are taxable as regular income when you withdraw money in retirement.

In addition to traditional SEP IRA plans that offer tax-deductible contributions, SEPs are also available as Roth accounts, which offer a different set of tax benefits. If you're curious about the differences between traditional versus Roth IRAs, plan to do additional research as part of your retirement planning.

Because SEP IRA plans are for business owners and self-employed people, they're more complex than standard IRAs. Here's how SEP IRAs work, in a nutshell:

• SEP IRA accounts are individual. Although a SEP IRA acts as a single retirement plan for your whole business, you must open separate SEP accounts for yourself and each eligible employee.
• All contributions are employer contributions. No employee contributions or employer matching is allowed.
• All contributions are made at the same rate. For instance, if you contribute 25% of your income to a SEP, you must also contribute 25% of each employee's compensation to their SEP accounts as well.
• Contributions can vary from year to year. You can reward yourself and your employees in a good year or pare back when times are lean.

Learn more: What is an IRA?

SEP IRA Contribution Limits

Compared to SIMPLE IRAs, traditional IRAs and Roth IRAs, SEP IRAs allow much higher annual contributions—up to $72,000 in 2026. SEP IRA contributions are based on a maximum of $360,000 in compensation in 2026. Here's how SEP contribution limits stack up against other IRAs:

Source: IRS

Learn more: Ways to Save for Retirement When You're Self-Employed

7 Questions About SEP IRA Rules

The IRS has detailed rules for setting up and maintaining a SEP. These seven common questions about how SEP IRAs work may help you decide whether or not they work for you.

Who Can Establish a SEP?

Businesses of any size can set up a SEP IRA plan, including sole proprietors, partners, corporations and nonprofits. Self-employed business owners who serve as their own sole employee are also eligible to establish a SEP.

Who Counts as an Eligible Employee?

Employers can set their own rules for eligibility, but at minimum they must include employees who meet these IRS requirements:

• Age 21 or older
• Has worked for the employer for at least three of the past five years
• Is not covered by a union agreement
• Is not a nonresident employee without any U.S. source of wages, salaries or other compensation from you
• Has received at least $800 in compensation

Employers can decide to set guidelines that are less restrictive, but not more restrictive. In other words, you can say employees younger than 21 are eligible, but you can't say employees have to be older than the minimum IRS requirement to qualify.

How Do Tax Deductions for Contributions Work?

Contributions to a SEP IRA may be tax deductible with the following provisions:

• Employers can deduct their SEP IRA contributions on their personal tax returns.
• Employees can exclude SEP IRA contributions from their taxable income.
• Traditional SEP IRA contributions are not subject to federal tax withholding, Social Security, Medicare and federal unemployment taxes.
• Employers can deduct employee contributions on their business tax returns, but deductions can't exceed total contributions made or 25% of compensation (whichever is less).
• Contributions to a Roth SEP IRA are not tax deductible. See more about Roth contributions below.

How Are Self-Employment Contributions Calculated?

Your SEP IRA contribution can't exceed 25% of your compensation. As a self-employed person, your compensation is defined as your net earnings from self-employment, minus half of your self-employment tax and any contributions you've made to your own SEP IRA. Learn more about self-employment contributions in IRS Publication 560.

Is There a Roth Version of the SEP IRA?

Yes, the SECURE 2.0 Act added the option of depositing SEP and SIMPLE IRA funds into a Roth account. Unlike contributions to a traditional SEP, Roth contributions are made after-tax and are not tax-deductible. However, investment gains made within your Roth accounts are generally tax-free, as are your qualified withdrawals in retirement. Distribution rules are generally more forgiving for Roth accounts as well.

What Are the Income Taxes on Distributions?

You can withdraw your money from a SEP at any time but will have to pay income taxes on it when you do, along with a 10% additional early withdrawal penalty if you're under 59½ years of age. Qualified withdrawals from a Roth account are generally tax-free.

How Long Before SEP IRA Funds Vest?

Contributions are always fully vested. This means you and your employees have access to the money in your SEP accounts as soon as it's contributed.

SEP IRA vs. Solo 401(k)

If your business is strictly a party of one, you can choose between a SEP IRA and a solo 401(k), which is a 401(k) for sole proprietors. Both plans have high contribution limits and they share many of the same tax advantages: tax-deductible contributions for traditional SEPs and solo 401(k)s, or tax-free withdrawals for Roth plans.

Key differences between these accounts center around contributions. With a solo 401(k), you can contribute as both the employer and the employee. In 2026, this translates to $24,500 in elective deferrals and 25% of your self-employment income. Solo 401(k)s allow catch-up contributions and, in 2026, super catch-up contributions for people ages 60 to 63. A solo 401(k) may also allow you to take out a loan against your retirement balance, which is not allowed with a SEP.

Learn more: What Is a Solo 401(k)?

SEP IRA Pros and Cons

Consider these pros and cons if you're trying to decide whether a SEP IRA works for you:

How to Open a SEP IRA

You can set up a SEP IRA through a brokerage firm, bank, credit union and some insurance companies. Funds may be invested in a variety of stocks, bonds, mutual funds, cash, annuities and other investments. When you're ready to establish your SEP, follow these three basic steps from the IRS:

1. Adopt a formal written agreement, choosing one of these three options:

   • Adopt an IRS model SEP: Complete and sign Form 5305-SEP.
   • Use an IRS-approved prototype: Your bank or financial institution may have one ready to go.
   • Design your own: Create an individually designed SEP plan document.
2. Provide each eligible employee with information about your SEP IRA plan.
3. Open a SEP IRA for each eligible employee.

Be aware: Open and fund your SEP IRA by the tax deadline (including extensions) for your business' income taxes, so you can calculate and deduct contributions on your tax return. Contributions for future years will also be due on tax day.

Frequently Asked Questions

The Bottom Line

SEP IRAs offer business owners and self-employed people an easy way to save toward retirement—and help employees reach their retirement goals—with high IRS contribution limits and both traditional and Roth options. And because SEP IRAs work for both sole proprietors and employers of any size, they can grow with your business as needed.