SEP IRA

A SEP IRA, which stands for Simplified Employee Pension Individual Retirement Account, is a type of retirement savings account designed for self-employed individuals and small business owners. It works similarly to a traditional IRA but allows for much higher contribution limits, making it a popular choice for freelancers, sole proprietors, and small business owners who want to save more for retirement.

With a SEP IRA, only the employer makes contributions. Employees cannot contribute to their own SEP IRA accounts. If a business owner has employees, they must contribute the same percentage of salary to each eligible employee’s account as they contribute to their own. This rule keeps the plan fair across the board.

2026 Contribution Limits: For 2026, contributions to a SEP IRA are limited to the lesser of 25% of an employee’s compensation or $70,000. This is significantly higher than the standard IRA contribution limit, which makes SEP IRAs attractive for high earners who want to maximize their retirement savings.

Contributions to a SEP IRA are tax-deductible, which can lower a business owner’s taxable income for the year. The money inside the account grows tax-deferred, meaning taxes are not paid until funds are withdrawn in retirement. Withdrawals taken before age 59 and a half are generally subject to a 10% early withdrawal penalty plus ordinary income taxes.

Practical Example: Suppose a freelance graphic designer earns $100,000 in net self-employment income in 2026. They could contribute up to 25% of their net earnings (after adjustments) to a SEP IRA, potentially setting aside around $18,587 or more depending on the exact calculation. That contribution reduces their taxable income and builds retirement savings at the same time.

Key features of a SEP IRA include:

• Easy to set up with minimal paperwork
• Flexible contributions, so business owners can contribute more in good years and less in slow years
• No annual filing requirement with the IRS in most cases
• Available at most major banks and brokerage firms

RetireGrader is not a financial advisor or fiduciary. Speaking with a qualified tax professional can help clarify how a SEP IRA fits into a specific financial situation.