SEP IRA

A Simplified Employee Pension (SEP) IRA is a retirement plan built on an ordinary IRA but funded with employer contributions, designed for the self-employed and businesses of any size. The employer contributes up to 25% of each employee's compensation or $72,000 for 2026, whichever is less. A self-employed owner contributes effectively 20% of net earnings after the self-employment tax deduction. Contributions are immediately vested, deductible, and can be made up to the tax-filing deadline, including extensions.

The simplicity is the feature and the limitation. There are no employee deferrals, no catch-up contributions after 50, and no practical Roth option. One uniform rule also applies: whatever percentage the employer funds for themselves must be funded identically for every eligible employee. That single constraint is why solo owners like the SEP and why owners with staff often outgrow it toward a solo 401(k).

Setup runs on IRS Form 5305-SEP or the provider's own document, takes minutes, and requires no annual filing. Contributions are computed per employee: 25% of W-2 compensation, or for the self-employed, effectively 20% of net earnings after the self-employment tax deduction. A freelancer with $120,000 of net profit carries roughly $8,500 of deductible SE tax, leaving adjusted earnings near $111,500, so the contribution ceiling is about $22,300. The money invests like any IRA, in whatever the custodian sells.

The deadline is the quiet advantage: contributions for a tax year can be funded until the filing deadline, including extensions, which is a full year of hindsight unavailable to 401(k) deferrals. The uniform rule then prices employees into the decision: funding 20% for the owner means funding 20% of every eligible employee's pay, and the costs appear on the same return. Employees count if they are 21 or older, earned at least $750, and worked three of the last five years, and they vest immediately. There is no loan provision, no in-service withdrawal structure, and no catch-up for anyone over 50. There is no fund menu, no plan portal, and no testing.

For a solo freelancer or a business owner without staff, the SEP is the highest-limit retirement account that asks for almost nothing. Setup takes minutes, there are no annual filings, and the contribution ceiling is several times the IRA limit at moderate incomes. The trade is that it is a blunt instrument, and the bluntness shows the moment employees enter the picture.

I watched a colleague named Brent (yes, that Brent) fund a SEP at 20% for three years with two employees on payroll, then discover the uniform rule had also funded roughly $28,000 of contributions for staff he considered part-time. Eligible employees earning $70,000 count at 21 or older regardless of how part-time they feel, and their contributions were already vested. The solo plan he needed was a solo 401(k); the plan he funded was his staff's.

The highest-leverage thing most Americans with 1099 income can do is size the SEP against the solo 401(k) before opening either: the SEP wins on simplicity, and the solo 401(k) adds a $24,500 employee deferral on top of the employer slice, which never contributes less. The self-employment tax calculator prices the deduction side, and the retirement savings calculator sizes the plan.