Planning for retirement doesn’t have to be complicated—especially if you’re a small business owner or self-employed. One of the simplest and most flexible retirement savings options available is the SEP IRA, or Simplified Employee Pension Individual Retirement Account.
In this guide, we’ll walk through how a SEP IRA works, who it’s best for, its benefits, and how to get started—so you can make smart, tax-savvy decisions for your financial future.
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What is a SEP IRA?
A SEP IRA is a type of retirement plan designed for self-employed individuals and small business owners, including those with a few employees. It operates similarly to a traditional IRA, but with higher contribution limits and greater flexibility for employers.
Unlike 401(k) plans or other employer-sponsored retirement accounts, SEP IRAs are easier to administer and don’t come with the same startup or operating costs. They’re especially appealing for sole proprietors, freelancers, or small teams that want to start saving for retirement without the red tape.
Learn more about retirement plan basics from the IRS SEP IRA page.
How does a SEP IRA Work?
With a SEP IRA, only the employer makes contributions—employees do not contribute from their own income. Contributions are made to each eligible employee’s SEP IRA account, including the business owner’s own account if they’re self-employed.
These contributions are:
- Tax-deductible for the business
- Tax-deferred for the employee (or self-employed individual), meaning taxes aren’t paid until funds are withdrawn in retirement
- Flexible, allowing you to change your contribution amount each year based on your income or business performance
💡 For 2025, you can contribute up to 25% of compensation or $69,000, whichever is less.
Who Should Consider a SEP IRA?
A SEP IRA is ideal for:
- Freelancers and independent contractors
- Sole proprietors
- Small business owners with a few (or no) employees
- Business owners with fluctuating income who want the flexibility to contribute more in good years and scale back in leaner years
One important note: if you have employees, you must contribute the same percentage of compensation to all eligible employees as you do to your own SEP IRA. That’s great if you’re a solo operator—but it requires planning if you’re building a team.
Key Benefits of a SEP IRA
Let’s take a closer look at why SEP IRAs are such a popular retirement option for small business owners and the self-employed:
1. Tax Advantages
Contributions to a SEP IRA are tax-deductible as a business expense, which reduces your taxable income and can significantly lower your tax bill. Plus, investments inside the account grow tax-deferred, helping your retirement savings compound over time.
If you’re already strategizing around taxes, you may also want to read our post: Tax Deductions vs. Tax Credits.
2. Ease of Setup
Unlike traditional employer retirement plans, a SEP IRA requires minimal paperwork and no annual filing for the employer. Most banks, brokerages, or financial institutions offer SEP IRA setup online, and you don’t need to work with a third-party administrator.
3. Flexibility in Contributions
You can decide how much to contribute each year (up to the IRS limits), or skip a year entirely if your business income is lower. This makes SEP IRAs particularly useful for seasonal businesses or those with fluctuating cash flow.
How to Open a SEP IRA
Getting started with a SEP IRA is straightforward. Here’s a quick checklist:
1. Talk to a Financial Advisor
It’s always wise to consult with a financial advisor or tax professional to ensure the SEP IRA fits your long-term retirement goals and business structure.
2. Complete IRS Form 5305-SEP
This is the formal document used to establish the SEP plan. You don’t file it with the IRS, but you must keep it on record. You can download it from the IRS website here.
3. Set Up the SEP IRA at a Financial Institution
Choose a bank, brokerage, or investment firm to open SEP IRA accounts for you and any eligible employees. Many major firms—such as Vanguard, Fidelity, and Schwab—offer low-fee SEP IRAs with a wide range of investment options.
4. Contribute Before the Deadline
Contributions can be made up until your tax filing deadline, including extensions. For example, if you file for an extension for your 2025 taxes, you could contribute to your SEP IRA as late as October 15, 2026.
SEP IRA vs. Other Retirement Options
While SEP IRAs offer simplicity, they’re not the only choice. You may also want to consider:
Traditional or Roth IRAs – Great supplemental accounts with different tax benefits.
Solo 401(k) – If you’re self-employed with no employees, this offers employee and employer contributions.
SIMPLE IRA – Another option for small businesses with fewer than 100 employees.
Check out our blog post on additional tax-advantaged retirement accounts designed specifically for business owners and self-employed professionals.
Final Thoughts
If you’re a small business owner, freelancer, or self-employed professional looking for a simple, tax-advantaged way to save for retirement, a SEP IRA may be exactly what you need. With high contribution limits, minimal paperwork, and flexibility year over year, it’s an ideal solution for long-term savings without the administrative hassle of more complex plans.
💼 Want help setting up a SEP IRA or understanding how it fits into your tax strategy? Contact us today for personalized guidance.
