SEP IRA: How Simplified Employee Pension Plans Work

A Simplified Employee Pension IRA (SEP IRA) is a traditional IRA for self-employed people and small-business owners.

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Updated Jan 9, 2026 · 6 min read

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Read an overview of SEP IRAs

What is a SEP IRA?

A SEP IRA, or Simplified Employee Pension, is a type of retirement account available to small-business owners with few or no employees, self-employed individuals, and those earning a freelance income. It has relatively low start-up and operating costs, as well as no mandatory annual filing or contribution requirement, which makes it a cost-effective and flexible retirement option for small-business owners.

How does a SEP IRA work?

Set up the SEP IRA. Create a formal written agreement with the IRS Form 5305-SEP or an account provider.
Define eligible employees and provide information to them. If you have employees, identify which ones are eligible, how much you'll need to contribute, and provide the account information to them (more on eligibility here ).
Set up SEP IRA accounts. Set up separate SEP IRAs for each eligible employee with the account provider.
Make contributions. Calculate how much you need to contribute to each employee's SEP IRA, or how much to add to your own as a self-employed individual.

Top things to know about a SEP IRA

Much higher contribution limits compared to individual IRAs. The contribution limit for SEP IRAs is typically 25% of an employee's compensation or a certain amount, whichever is less, as defined by the IRS every year. The SEP IRA contribution limit is the lesser of 25% of compensation or $70,000 in 2025 and $72,000 in 2026. There are separate rules for self-employed individuals. (More on SEP IRA contribution limits, and how to calculate them, here .)
Tax-deductible contributions. Employer contributions to SEP IRAs are tax-deductible. Employee contributions can be excluded from gross income when filing tax returns

IRS. Simplified Employee Pension plan (SEP). Accessed Jan 9, 2026.
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. Employers can make contributions up until the tax extension deadline in October.
Immediate vesting. The money contributed to a SEP IRA immediately belongs to the employee, who is then responsible for investing those contributions .
Contributions are not required every year. Employers do not have to contribute to a SEP IRA every year, which could be ideal for businesses with unpredictable or fluctuating incomes.
Same withdrawal rules as other IRAs. Employees typically cannot make early withdrawals from a SEP IRA without incurring penalties and taxes.

What is a SEP IRA?

A SEP IRA (simplified employee pension) is a type of individual retirement plan that helps business owners and self-employed individuals save for retirement. It's similar to a traditional IRA in that contributions are tax-deductible for the business. Investments also grow tax-deferred until retirement, when distributions are taxed as income.

» How to find a financial advisor who can help plan retirement

SEP IRA contribution limits 2025 and 2026

Every year, the IRS reviews SEP IRA contribution limits. The SEP IRA contribution limit is the lesser of $70,000 in 2025 or $72,000 in 2026, or up to 25% of compensation or net self-employment earnings, with a $350,000 limit in 2025 on compensation that can be used to factor the contribution. In 2026, that limit is $360,000.

The 25% limit is also the maximum you can contribute for each eligible employee. There's no catch-up contribution at age 50 and older for SEP IRAs.

Employer contributions need to be made by the due date, including extensions, of your federal income tax return. This means if you filed for an extension this year, you have until October 15, 2026, to make a contribution for the 2024 tax year.

SEP IRA rules: Who is eligible?

Generally, SEP IRAs are best for self-employed people or small-business owners with few or no employees.

Here's why: If you have employees whom the IRS considers eligible participants in your plan, you must contribute on their behalf, and those contributions must be an equal percentage of compensation to your own.

Eligible participants are employees who are 21 or older, have worked for you for at least three of the past five years, and have made a minimum of $750. For example, if an employee worked for you in 2022, 2023 and 2024 and made $850, you would need to make a contribution for them for the 2025 plan year.
If you want to stash away 15% of your compensation for yourself, you must also contribute 15% of that employee's compensation to their plan. Note that this is just an example — SEP IRAs are subject to contribution limits listed above.
Employees own and control their own accounts.

Because of that rule requiring equal contributions as a percentage of compensation, a SEP IRA is generally best for self-employed people or small-business owners with few or no employees.

» Are you on track for retirement? Check our retirement calculator to find out

How does a SEP IRA work? The pros and cons

Pros

Relatively high contribution limits.

Easy to set up and administer.

Can be combined with a traditional IRA or a Roth IRA.

Contributions are tax-deductible.

Flexibility: You don't have to commit to contributing every year.

Cons

No catch-up contribution for savers 50 or older.

Required proportional contributions for each eligible employee if you contribute for yourself.

SEP IRAs require minimum distributions.

Distributions before age 59 ½ are taxed as income and subject to a 10% penalty unless the distribution qualifies for an exception.

» Learn more: Early withdrawal exceptions for IRAs

How do I open a SEP IRA?

It's easy to open a SEP IRA account online. The first step is to choose an account provider. Then, the IRS outlines three steps for setting up your SEP IRA:

Create a formal written agreement. You can do this with IRS Form 5305-SEP or through your account provider.
Give eligible employees information about the SEP IRA. You can give them a copy of IRS Form 5305-SEP or get similar information through your account provider.
Set up separate SEP IRAs for each eligible employee with the account provider.

» Find the best IRA account for you

How do I invest my SEP IRA?

Once you’ve opened the account, you can choose from the investments your account provider offers. The selection typically includes stocks, bonds and mutual funds. (It's possible to open an IRA at a bank, but generally you'll be limited to investing in certificates of deposit, which usually offer a lower return than a diversified group of stocks and bonds.)

Consider your age, planned retirement age and risk tolerance.

If you have a high risk tolerance and a long time until retirement, consider stocks, specifically stock index funds, which track a segment of the market and hold a diverse mix of stocks within that segment.
If you have low risk tolerance or a short time until retirement, consider bonds and bond funds. You can also buy index funds for bonds.

» Want more IRA investing lessons? Learn how to invest your IRA

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SEP IRA vs. Roth IRA

The Secure 2.0 Act created a Roth version of the SEP IRA. Note that not all SEP IRA providers offer this option.

This means that you may need to choose between a traditional SEP IRA, a Roth SEP IRA or an individual Roth IRA.

The main difference between a traditional SEP IRA and a Roth IRA (or a Roth SEP IRA) is that traditional SEP IRAs offer tax-deferred growth on your investments, while Roths give you tax-free growth and withdrawals in retirement.
Contributions to traditional SEP IRAs are tax deductible. You can't deduct contributions to a Roth account; you paid taxes on the money before adding it to your account.
Traditional and Roth SEP IRAs also have higher contribution limits (up to $70,000 in 2025, or $72,000 in 2026) than individual Roth IRAs ($7,000 in 2025 or $7,500 in 2026).

SIMPLE IRA vs. SEP IRA

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a retirement savings plan for employers and self-employed people. Some of the eligibility requirements include having no more than 100 employees who earned at least $5,000 in the previous year .

The main difference between a SIMPLE IRA and a SEP IRA is that only employers are allowed to contribute to SEP IRAs, but employees can contribute to SIMPLE IRAs through their paycheck via elective deferrals.
Another core difference is that the SIMPLE IRA employee contribution limit is much smaller than a SEP IRA's.

» This quiz can help you see if it's time to get a financial advisor

Frequently asked questions

Can I have a SEP IRA and a Roth IRA?

You can combine a SEP IRA with a traditional or Roth IRA. If you’re an employee who is covered by a SEP IRA, employer contributions don’t reduce the amount you can contribute to an IRA for yourself, but the amount of your traditional IRA contribution that you can deduct may be reduced at certain higher income levels, due to the combination of both plans . (For more information, see the IRA contribution limits.)

Can I contribute to both a SEP IRA and a traditional IRA?

The government places no restrictions on contributing to both a SEP IRA and a traditional IRA in the same year. Also note, your SEP IRA contributions as an employer do not affect your contributions to a traditional IRA.

However, there are income limits to deducting contributions to a traditional IRA, and it also depends on your filing status and whether you already have a workplace retirement account.

Is there a deadline to set up and contribute to a SEP IRA?

Yes, the deadline to set up and contribute to a SEP IRA is the tax filing deadline, including extensions. This means that you have until October 15th to contribute for the previous tax year.

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