SEP IRA
A SEP IRA (Simplified Employee Pension) is a retirement plan that allows self-employed individuals and small business owners to contribute up to 25% of compensation or $69,000 (2025), whichever is less.
A SEP IRA is one of the simplest retirement plans to set up and maintain. There is no annual filing requirement with the IRS (unlike a 401(k)), and you can open one at most brokerage firms with minimal paperwork.
Contributions are made entirely by the employer — employees (including the self-employed owner) do not make salary deferrals. For self-employed individuals, the effective contribution rate is approximately 20% of net self-employment income after the self-employment tax deduction.
One important consideration: if you have employees, you must contribute the same percentage of compensation for every eligible employee as you contribute for yourself. This can make SEP IRAs expensive for businesses with staff.
Contributions are tax-deductible and reduce your taxable income. The money grows tax-deferred until withdrawal in retirement, when it's taxed as ordinary income.
The biggest limitation compared to a Solo 401(k) is the absence of employee deferrals and no Roth option. For business owners under 50 with income above $92,000, a Solo 401(k) often allows higher total contributions than a SEP IRA.
Practical Example
Lisa runs a freelance design business earning $120,000 in net self-employment income. She contributes 20% ($24,000) to her SEP IRA. At a 24% tax bracket, this reduces her federal tax bill by $5,760. She set up the account in 15 minutes and has no annual filing requirements.