Financial Basics · Retirement Accounts

SEP-IRA

Definition

A Simplified Employee Pension (SEP) IRA is a retirement account for self-employed individuals and small business owners. Contributions are employer-only, up to 25% of compensation or $71,000 (2026), whichever is less.

Why it matters in retirement

If you're self-employed or earning 1099 income in retirement, a SEP-IRA lets you shelter dramatically more than a regular IRA — up to 10× more in many cases. Simple to open, cheap to run, and massively underutilized.

Key Numbers — 2026

Contribution limit (2026)
$71,000
Contribution cap
25% of comp
Self-employed effective rate
~20% of net SE
Deadline
Tax filing + extensions

Pros

  • Very high contribution limit
  • Simple to administer
  • Flexible — skip contributions in low-income years
  • Tax filing deadline contributions allowed

Cons

  • Employer must contribute equal % for all eligible employees
  • No Roth option (yet widely available)
  • No loans
  • Counts against pro-rata rule for backdoor Roth

Common mistakes

  • Opening a SEP when employees make it expensive (Solo 401(k) may fit better)
  • Combining SEP with backdoor Roth (pro-rata rule trap)
  • Missing the tax filing deadline for current-year contributions
  • Not understanding the 25% of net self-employment calculation

Related

IRA

An Individual Retirement Account (IRA) is a self-directed retirement account with tax advantages. Traditional IRAs offer pre-tax contributio…

401(k)

A 401(k) is an employer-sponsored retirement plan that lets employees defer pre-tax (or Roth) salary into an investment account. Most employ…

Roth IRA

A Roth IRA is an after-tax retirement account where contributions grow tax-free and qualified withdrawals are tax-free in retirement. Contri…

Pension

A pension (defined benefit plan) promises a specific monthly payment for life based on years of service and final salary. Contrast with defi…

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