Most people save for retirement with the help of their employer’s retirement plan—typically a 401(k) offered as part of an employee benefits package. If you’re self-employed or the owner of a small business, you’re the employer—so you need to BYORP (bring your own retirement plan). Enter the SEP IRA, or Simplified Employee Pension plan.
What is a SEP IRA?
A SEP IRA is a traditional retirement account primarily utilized by the self-employed and small businesses. It can potentially provide a tax deduction for the employer of eligible contributions, as well as tax-deferred growth of any investments held inside the account.
The main selling points of SEP IRAs are low cost and simplicity: They entail fewer administrative responsibilities than other types of retirement accounts and typically don't impose start-up costs or annual fees. On the other hand, they carry restrictions that may not suit larger businesses.
How does a SEP IRA work?
In some ways, SEP IRAs work a lot like other traditional retirement accounts. Contributions made today may be able to be deducted from the contributor’s taxes, and any contributions can be invested and grow tax-deferred until withdrawn in retirement. Withdrawals, regardless of age, are taxed as ordinary income.
What makes SEP IRAs unique is that generally the only contributor to them is the employer, whether that’s a self-employed person acting as their own employer or a small-business owner. Employees typically cannot make SEP IRA contributions themselves, but they can make traditional IRA contributions to their SEP IRA account.
If they make contributions in a given tax year, employers must contribute the same percentage of salary to each eligible employee’s account. The percentage can vary from year to year, allowing for larger plan contributions in profitable years and smaller contributions in down years—and even no contributions in truly bad years. Such variations in contribution levels don’t trigger additional paperwork.
Who’s eligible to open a SEP IRA?
SEP IRAs are available to businesses of all sizes, but they tend to be best suited to self-employed individuals,1 small-business owners, or members of a partnership. That’s because if a business establishes a SEP IRA, it must open and contribute an equal percentage of income to all eligible employees’ accounts.
What makes someone an eligible employee? The IRS stipulates that an employer cannot require an employee to meet more than the following qualifications to be eligible to participate in a SEP plan:
- Earn at least $750 in annual compensation in 2025 from the SEP IRA-sponsoring employer.
- Be 21 or older in 2025.
- Have been a full-time employee at the SEP IRA-sponsoring company for any period during at least 3 of the last 5 years.
An employer can opt to use less restrictive qualifications; they just cannot exceed those set forward by the IRS.
Even if you meet your employer’s qualification requirements, you may be ineligible for SEP IRA contributions if:
- You are not a US resident and do not receive US wages.
- You have retirement benefits from a union’s collective bargaining agreement.
Who’s eligible to contribute to a SEP IRA?
While SEP IRAs are generally funded only by employer contributions, there are some exceptions for certain plans. Any individual contributions will count against the total contribution limits for other IRAs in a given tax year. In tax year 2025, the IRA contribution limit is $7,000, or $8,000 if you are age 50 or over.
SEP IRA contribution limits
For 2025, the SEP IRA contribution limit is the lesser of $70,000 or 25% of an eligible employee’s total compensation. For example, an employer could contribute up to $25,000 for an employee making $100,000. The $70,000 limit is the same for 401(k)s and 403(b)s when you factor in both employer and employee contributions.
Each business establishes what percentage (up to 25%) is contributed to a SEP IRA each year. For self-employed people, the contribution limit for SEP IRAs is tied to their net earnings as an employee of their business. Calculating net earnings (and therefore their SEP IRA contribution limit) may be complicated, so it could be smart to consult a tax professional.
Use the Fidelity Small Business Retirement Plan Contribution Calculator to help determine your contribution limit.
SEP IRA contribution deadline
The SEP IRA contribution deadline is the due date of the sponsoring business’s income tax return for that year. This is typically April 15, but it could be as late as October 15 (generally), of the following year if the business has filed a tax extension.
SEP IRA advantages
SEP IRAs offer certain key benefits, including:
- Lower administrative costs
Compared to other workplace retirement plans like 401(k)s, SEP IRAs tend to have lower administrative responsibilities and costs. They also allow for more flexibility in determining how much an employer contributes each year, enabling an employer to hypothetically contribute 5% one year and 20% the next based on fluctuating financial circumstances.
- Tax benefits
SEP IRAs may allow employers (and potentially even employees making their own traditional IRA contributions to the account) to deduct the contributions each makes from their respective taxes. In addition, contributions can be invested by employees and grow tax-deferred until retirement.
- Immediate vesting
Employees fully own any SEP IRA assets as soon as an employer contributes money to the account. This may help employers retain valuable employees.
- Higher contribution limits than other IRAs
While SEP IRAs have the same total contribution limits as some other types of employer-sponsored retirement plans, like 401(k)s and 403(b)s, they do substantially exceed the contribution limits of other types of IRAs, making them appealing options for self-employed people looking to save even more for retirement.
- Potentially more investment options than other workplace plans.
SEP IRAs typically offer many more investment options than other workplace plans, giving businesses and employees greater flexibility to design portfolios that suit their needs. The accounts have the same investment limitations as ordinary IRAs, including restrictions on collectibles, coins, real estate that you derive a direct benefit from, and certain types of derivative positions.
- Year-to-year flexibility
SEP IRAs are a year-to-year plan, giving you flexibility in when to offer and administer this workplace retirement savings option. You may have it for many years, or switch to another plan in an upcoming year. With a SEP IRA you are not locked into keeping this as your plan for more than a single year.
SEP IRA disadvantages
SEP IRAs do have some limitations compared to other retirement savings plans, such as:
- Required employer contributions
Business owners must contribute the same percentage of earned income for all eligible employees. So if you’re a small-business owner with eligible employees, you can’t just contribute to your own plan. It could also be frustrating when percentage-based requirements tied to compensation prevent you from making a desired contribution for certain employees.
- Limited individual contributions
If you are not a business owner, you likely have no control over how much is contributed to your SEP IRA, unlike other retirement plans that allow for employee contributions.
- No catch-up contributions
Many retirement accounts have “catch-up contributions” that increase your individual contribution limit as you near retirement age. SEP IRAs typically do not allow catch-up contributions.
- Limited withdrawal flexibility
Withdrawals from a SEP IRA before age 59½ may be subject to taxes and penalties, similar to traditional IRAs.
- No ability to borrow from a SEP IRA
Unlike some other employer retirement plans, employees cannot take out loans from their SEP IRA retirement funds.
- SEP IRAs are not ERISA plans and do not offer the same level of creditor protection
IRAs are protected in the event of bankruptcy under federal law, but additional coverage varies by state. Consult your tax advisor for details regarding the laws within your state.
SEP IRA withdrawal rules
The rules governing access to the assets are similar to the rules for traditional IRAs:
- Withdrawals from a SEP IRA after the age of 59½ are penalty free, but you do have to pay any applicable income taxes.
- Withdrawal of funds prior to age 59½ may be subject to a 10% early withdrawal penalty, along with any applicable income taxes.2 You can make a withdrawal from your SEP IRA prior to age 59½ without incurring the early withdrawal penalty in specific circumstances, including health insurance premiums paid while unemployed, higher education expenses, or a first home purchase, up to a lifetime limit of $10,000.
- You can roll your SEP IRA assets into another IRA or employer plan, subject to some restrictions depending on the receiving account or plan.
- You can roll assets from another retirement account into your SEP IRA. Learn more about self-employed rollover options.
How to set up a SEP IRA
Establishing a SEP IRA is relatively easy and straightforward, and setting one up takes only slightly more work than opening a traditional IRA. Here’s how to get started.
1. Find a financial institution that offers SEP IRAs
Most financial institutions that offer retirement accounts provide SEP IRAs. Investigate possible fees for setup and maintenance. It could also be smart to look at the investment options, noting any investment fees, minimums, or trading commissions.
2. Open and administer your and any eligible employees’ SEP IRAs
Once you pick a SEP IRA provider, set up an account for each eligible employee. From there, administering a SEP IRA is simple and inexpensive. You do not need to fill out the IRS Form 5500, as you do with several other small-business retirement savings accounts.
That said, providing a SEP IRA to eligible employees does involve some responsibilities. Employers must have a record of the plan agreement on file (though it does not need to be filed with the IRS). The IRS recommends, but does not require, using Form 5305 for this purpose. You are required to have a written agreement with employees that outlines the details of the plan and notes the dates of contributions to their accounts.
3. Invest any contributions
Once the employer contribution is made, employees can invest the money in any of the investment options offered by the account provider.
The bottom line on SEP IRAs
If you’re self-employed, a SEP IRA could offers the best combination of features, including cost, flexibility, investment options, and contribution limits, for your needs.
The decision becomes more complicated if you have employees: In that case, weigh the account’s appealing features against the mandate to contribute the same percentage of income for your workers that you contribute for yourself. If that requirement is not onerous, this account may provide an attractive way to save for your own retirement while offering employees an enticing benefit.