Self-employed people and small business owners have access to one of the most powerful retirement savings tools available — and most of them don’t use it.
A Simplified Employee Pension plan, or SEP-IRA, allows contributions of up to $70,000 per year (in 2026), is easy to set up, and requires almost no ongoing administration. If you’re self-employed and you’re not contributing to a SEP-IRA, you’re likely paying more in taxes than you should be — and building far less retirement wealth than you could.
What Is a SEP-IRA?
A SEP-IRA is a type of Individual Retirement Account specifically designed for self-employed individuals and small business owners. It works like a Traditional IRA — contributions are tax-deductible, investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income.
What makes it powerful is the contribution limit: significantly higher than a standard IRA’s $7,000 annual limit. A self-employed person can contribute up to 25% of their net self-employment income, up to a maximum of $70,000 in 2026.
2026 Contribution Limits and How They’re Calculated
For self-employed individuals, the contribution calculation is slightly more complex than it appears:
- You can contribute up to 25% of your net self-employment income after deducting the SEP contribution and the deductible self-employment tax
- The effective maximum rate works out to approximately 20% of net self-employment income
- The absolute maximum contribution is $70,000
Example: If your net self-employment income is $150,000, your maximum SEP contribution is approximately $28,576. At $280,000 net income, you’d hit the $70,000 cap.
Your CPA or tax software will calculate the exact maximum. The key point: if you’re earning $100,000+ as a self-employed person and not contributing to a SEP-IRA, you’re likely leaving a significant tax deduction unclaimed each year.
How to Set Up a SEP-IRA
This is genuinely simple — one of the easiest retirement accounts to establish:
- Open a SEP-IRA account with a broker — Fidelity, Vanguard, Schwab, and TD Ameritrade all offer SEP-IRAs with no setup fees and access to low-cost index funds
- Complete IRS Form 5305-SEP (a simple one-page document — no filing required, just keep for your records)
- Make contributions before your tax filing deadline, including extensions — you have until October 15 to contribute for the prior tax year if you file an extension
💡 Late start advantage: Unlike a 401(k), you can open and fund a SEP-IRA for the prior tax year up until your tax filing deadline. If you realize in March that you owe significant taxes, opening a SEP-IRA can still reduce that bill — retroactively.
SEP-IRA Rules When You Have Employees
If you have employees, SEP rules get more complicated — and more expensive. When you contribute to your own SEP-IRA, you must contribute the same percentage of compensation to every eligible employee’s SEP-IRA as well. Eligible employees are those who are 21+, have worked for you in at least 3 of the last 5 years, and earned at least $750 in the year.
This uniform contribution requirement is why many business owners with employees choose a Solo 401(k) (if they have no full-time employees other than themselves and a spouse) or a SIMPLE IRA instead.
SEP-IRA vs. Solo 401(k) — Which Is Better?
| Feature | SEP-IRA | Solo 401(k) |
|---|---|---|
| Max contribution (2026) | $70,000 | $70,000 + $7,500 catch-up (50+) |
| At lower income levels | Lower contribution possible | Higher contribution possible |
| Roth option | No | Yes |
| Loan provision | No | Yes |
| Administrative complexity | Very simple | Moderate |
| Employees allowed | Yes (costly) | No (except spouse) |
For high-income solo self-employed individuals who want maximum simplicity, a SEP-IRA is excellent. For those who want a Roth option, have moderate income, or are over 50 and want catch-up contributions, a Solo 401(k) often wins on pure contribution optimization.
Frequently Asked Questions
Q: Can I have both a SEP-IRA and a Traditional IRA?
Yes. You can contribute to both. However, if you or your spouse is covered by a workplace retirement plan, the deductibility of your Traditional IRA contribution phases out at certain income levels. A SEP-IRA is considered a workplace plan for this purpose.
Q: Can I contribute to a SEP-IRA if I have a day job with a 401(k)?
Yes — if you have self-employment income on the side, you can contribute to a SEP-IRA based on that income, in addition to contributing to your employer’s 401(k). The SEP contribution limit is separate from the 401(k) employee contribution limit.