SEP IRA

What is a SEP IRA?

A Simplified Employee Pension IRA (SEP IRA) is a retirement plan designed for self-employed workers, freelancers, and small business owners. It lets a business owner make tax-deductible contributions for themselves and any eligible employees, with contribution limits far above a standard Traditional IRA.

Key features

• High contribution limit: up to 25% of compensation, capped at an IRS-set dollar amount each year (several times the standard IRA limit)
• Employer-funded only: contributions come from the business, not the employee. For sole proprietors, the business owner is both
• Tax-deductible contributions: reduce the business's taxable income
• Tax-deferred growth: investments inside the account grow without annual tax
• Easy setup: much simpler paperwork than a Solo 401(k)
• No catch-up contributions: unlike 401(k) and IRA, no extra contribution room for age 50+

SEP IRA vs. Solo 401(k)

Both are for self-employed individuals with similar total contribution room. The SEP IRA is easier to administer. The Solo 401(k) usually allows a higher contribution at lower income levels (because of the employee deferral component), permits Roth contributions, and allows plan loans. Business owners with employees often prefer SEP for its simplicity; solo operators at higher incomes often prefer the Solo 401(k) for the extra flexibility.

For a side hustle or freelance income, a SEP IRA is the fastest way to shelter a large chunk of earnings from tax while saving for retirement.