The SEP IRA: A Retirement Plan Made for Entrepreneurs

For many self-employed individuals, the only piece of their retirement plan is a Traditional or Roth IRA. The problem many successful business owners run into is that the $7,500 contribution limit is not enough to ever replace their income. For some self-employed individuals and business owners, a SEP IRA can provide an opportunity to save substantially more for retirement. In 2026, SEP contributions can be as high as $72,000, subject to applicable compensation and contribution limits.

The Short Version

• 2026 limit: the lesser of 25% of compensation or $72,000
• Effective rate if you file a Schedule C: 20% of adjusted net earnings
• Income needed to max it out: roughly $360,000
• Deadline to open and fund: your tax filing deadline, including extensions — as late as October 15. Some refer to this as the procrastinators plan.
• Setup time: under 30 minutes at most custodians
• Ongoing paperwork: none. No Form 5500, no administrator, no annual filing
• Catch: if you have employees, you must contribute the same percentage for them

How a SEP IRA Works

SEP stands for Simplified Employee Pension. It is a form of Individual Retirement Account, which means a business owner can set one up independently.

SEP contributions are generally deductible, subject to applicable limits and individual tax circumstances. Earnings within the account generally grow tax-deferred until withdrawn. Because the plan was designed for owners to establish themselves, it carries no annual filing, no administrator, and no ongoing cost beyond what the custodian charges to hold your investments.

Contributions are also discretionary and available until your tax filing deadline. That flexibility is worth more than it sounds: you can sit down with your accountant, see the tax bill for the year, and then use a SEP contribution to lower it — making a significant retirement contribution against income you have already earned.

How to Open One

The IRS breaks establishment into three steps. For a solo owner, all three happen in a single sitting.

Step 1: Choose a custodian and open the account. Fidelity, Schwab, Vanguard, and most brokerages offer SEP IRAs with no setup fee and no minimum. You will need your business name and your EIN, or your Social Security number if you are a sole proprietor without one.

Step 2: Execute the plan document. This is IRS Form 5305-SEP, which your custodian supplies with the application. You sign it and keep it with your records — it is not filed with the IRS. One caveat: you cannot use Form 5305-SEP if you already maintain another qualified plan, use leased employees, or want a non-calendar plan year. Your custodian can provide a prototype document instead.

Step 3: Fund it, and open accounts for any eligible employees. Each eligible employee needs their own SEP-IRA, plus a copy of the plan document and an annual statement of what is contributed. If you are the only participant, you only need to do this for yourself.

Then choose investments. This is the step some forget — money that lands in a SEP sits in cash and needs to be invested if you want it to grow.

Who Can Participate

Almost any business structure works — sole proprietors, single-member LLCs, partnerships, S-corporations, and C-corporations — which covers freelancers, contractors, consultants, physicians in private practice, and anyone else reporting self-employment income. You do not need to be full-time either. The one hard requirement is that contributions come from self-employment earnings, or, if you are an employee in the plan, from the W-2 wages your business pays you.

SEP IRAs may not be right if you plan to hire. You must include any employee who is 21 or older, has worked for you in at least three of the last five years, and earned at least $800 from the business in 2026. The consequence that catches owners off guard is proportionality: you must contribute the same percentage of compensation for every eligible employee that you contribute for yourself, with no vesting schedule to soften the cost if someone leaves or is fired. Twenty percent for you means twenty percent of each employees respective salary.

None of this matters for a solo owner. It matters enormously the year you hire, and it is the most common reason a growing business outgrows its SEP.

What You Can Actually Contribute

The twenty-five percent figure is where nearly everyone miscalculates. For an S-corporation owner paying a W-2 salary, the math is direct: a $150,000 salary supports a $37,500 contribution. If you file a Schedule C, your compensation is defined as net earnings after the SEP contribution has been deducted. Solve that circular definition and twenty-five percent becomes an effective rate of twenty percent.

Getting to your number takes three steps:

Step 1: Start with your net business profit.

Step 2: Subtract the deductible half of your self-employment tax.

Step 3: Multiply what is left by twenty percent.

One limitation surprises people who spent years in a corporate plan: a SEP has no catch-up contribution at any age, while a 401(k) participant over 50 gets an additional $8,000 in 2026.

Pairing a SEP With a Roth IRA

They are separate buckets. A SEP contribution does not consume any part of your personal IRA limit, so in 2026 you can fund a SEP with up to $72,000 and still contribute $7,500 to a Roth, or $8,600 if you are 50 or older.

They are taxed in opposite directions, which is the point of using both. SEP IRA contributions may provide a current tax deduction, while distributions are generally taxable as ordinary income. Roth IRA contributions do not provide an upfront deduction, but qualified withdrawals are generally tax-free. Money in both plans gives you control over your taxable income later. This is a valuable lever to govern your future tax brackets and Medicare premiums.

Depending on your individual tax circumstances, a deductible SEP contribution may affect your modified adjusted gross income and, in some cases, your eligibility to make a direct Roth IRA contribution. Because Roth eligibility calculations can be complex, business owners should confirm their eligibility with their tax professional. Roth IRAs phase out in 2026 between $153,000 and $168,000 of modified adjusted gross income for single filers, and between $242,000 and $252,000 for joint filers. Plenty of owners see those numbers, assume they earn too much, and stop there. But your SEP contribution reduces the very income figure used to test eligibility — often by enough to bring a high earner back under the threshold, as the example below shows.

The Tax Picture, and the Tradeoffs

Contributions are deductible to the business, taken on Schedule 1 of Form 1040, which reduces adjusted gross income whether or not you itemize. Worth noting what it does not do: the deduction reduces income tax, not self-employment tax. Growth is tax-deferred, and withdrawals are taxed as ordinary income, with a ten percent penalty before 59½.

At lower incomes the structure works against you. A business netting $40,000 supports a contribution of roughly $7,400, no better than an IRA, because every dollar is an employer contribution and there are no salary deferrals.

The deduction also shrinks your QBI deduction. A retirement plan contribution reduces qualified business income, which reduces the 20% deduction available under Section 199A. The practical effect is that your true saving is smaller than your bracket implies — a taxpayer in the 24% bracket nets closer to 19% once the two interact.

A SEP IRA can complicate a backdoor Roth strategy. Because SEP IRA balances are generally included with other pre-tax IRA balances when applying the pro-rata rule, a Roth conversion may result in a larger taxable amount than anticipated. This should be considered before establishing or funding a SEP IRA if a backdoor Roth strategy is part of your plan. That strategy works cleanly only when you hold no other pre-tax IRA balances, and a SEP is one — under the pro-rata rule, the IRS aggregates all your traditional, SEP, and SIMPLE IRA balances to determine how much of a conversion is taxable. For many people the deduction is worth more, but it should be an informed decision rather than a surprise discovery in April.

What This Looks Like in Practice

Consider a hypothetical consultant named Rachel. She is 55, runs a solo practice, files a Schedule C, and earns $200,000 in net business profit. She has decided that she wants to increase the amount she is putting toward retirement over the next several years.

If she only contributed to a Roth IRA, her annual contribution would generally be limited to $8,600 in 2026, assuming she is eligible to contribute directly. A SEP IRA could potentially allow a substantially larger annual contribution based on her self-employment earnings.

On $200,000 of net business profit, Rachel may be able to contribute approximately $37,000 to a SEP IRA, depending on her individual tax circumstances. She could potentially make a Roth IRA contribution as well, assuming she meets the applicable eligibility requirements.

The example illustrates why the type of retirement plan can make a meaningful difference for a self-employed business owner who wants to increase retirement savings. Actual contribution amounts and tax benefits depend on compensation, business structure, tax circumstances, and other factors.

When a Different Plan Fits Better

The SEP is not always the largest door. Three alternatives are worth knowing before you commit.

A solo 401(k) usually allows more savings, particularly after 50. Because it permits salary deferrals on top of the employer contribution, it can shelter far more at the same income, as Rachel’s numbers show. The tradeoff is timing: to make deferrals for a given year, the plan generally must exist by December 31.

A cash balance plan goes considerably further. For an owner in their fifties with high, stable income who wants to defer well beyond $72,000, a cash balance or defined benefit plan can support six-figure annual contributions. It costs more to run — an actuary, an annual filing, a multi-year funding commitment — but for certain business owners with high, stable income, a cash balance or defined benefit plan may provide significantly greater contribution opportunities

A SIMPLE IRA fits lower incomes. Below roughly $50,000 of net profit, a SIMPLE IRA generally permits a larger contribution than a SEP on the same earnings.

The right plan depends on your age, your income and how stable it is, and whether you plan to hire. That analysis is worth running before you fund anything, and it is one we work through with business owners regularly.

Before You Fund Any Plan

What the SEP does better than anything else is convert a decision you have been postponing into one you can make in an afternoon. Four things to check first:

• Your number. Run the twenty percent calculation on your most recent net profit.
• Your cash. Weigh the contribution against what you need liquid over the next two years.
• Your Roth eligibility. Check whether the deduction moves you under the threshold.
• Your hiring plans. If you expect to add employees, price the proportionality cost first.

You built something that pays you. The remaining question is how much of it you keep.

---

Frequently Asked Questions

How much can a self-employed person contribute to a SEP IRA in 2026?

Up to twenty percent of adjusted net earnings from self-employment, capped at $72,000. S-corporation owners taking a W-2 salary use twenty-five percent of that salary. Reaching the cap requires roughly $360,000 in adjusted net earnings.

Do I need an EIN to open a SEP IRA?

Not necessarily. A sole proprietor without employees can generally open one under a Social Security number, though most custodians will accept an EIN if you have one. If you have employees, you will already have an EIN for payroll.

Can I contribute to both a SEP IRA and a Roth IRA in the same year?

Yes. The limits are entirely separate. In 2026 that means up to $72,000 in a SEP plus $7,500 in a Roth, or $8,600 if you are 50 or older, subject to the Roth income limits. Because the SEP deduction lowers your modified adjusted gross income, it can also be what brings you under those limits in the first place.

Does a SEP IRA affect my ability to deduct a traditional IRA contribution?

Yes. Contributing to a SEP means you are considered covered by a workplace retirement plan, which phases out traditional IRA deductibility above $81,000 of modified adjusted gross income for single filers and $129,000 for joint filers. Roth IRA contributions are unaffected, since they were never deductible.

When is the deadline to open and fund a SEP IRA?

Your business tax filing deadline for that year, including extensions — April 15 for most sole proprietors, or October 15 if you file for an extension. Once you file the return, the window for that year closes.

Can I open a SEP IRA if I also have a job with a 401(k)?

Yes. Self-employment income from a side business supports its own SEP. Your 401(k) deferrals and your SEP contribution are governed separately, though the overall $72,000 limit interacts across plans depending on your situation. Worth reviewing before you contribute.

What happens if I hire employees?

Employees who are 21 or older, have worked for you in three of the last five years, and earned at least $800 in 2026 generally must be included, and you must contribute the same percentage of compensation for them as you do for yourself. This is the point at which many owners move to a different plan structure.

Is a SEP IRA better than a solo 401(k)?

Often it is not, in pure contribution terms. Because a solo 401(k) allows salary deferrals plus an over-50 catch-up on top of the same employer contribution, it usually shelters more taxes at the same income level. An owner over 50 netting $200,000 could defer roughly $69,700 in a solo 401(k) versus about $37,200 in a SEP. One potential advantage of a SEP IRA is its relative simplicity and the ability, in many circumstances, to establish and fund the plan through the business’s tax-filing deadline, including extensions. A solo 401(k) generally must exist by December 31 to allow deferrals, while a SEP can be opened and funded up to your extended filing deadline.

Can I contribute more than $72,000 in a year?

Not through a SEP. Owners with high, stable income who want to defer beyond that typically look at a cash balance or defined benefit plan, which can support six-figure annual contributions in exchange for actuarial costs, an annual filing, and a multi-year funding commitment.

What happens to my SEP if I go back to working for someone else?

Nothing happens to the money. The account remains yours and continues to grow. You simply stop contributing, since contributions require self-employment income. You can leave it where it is or roll it into another IRA.

Are there required minimum distributions?

Yes. SEP IRAs generally follow the RMD rules applicable to traditional IRAs. The age at which RMDs begin depends on your date of birth under current law

---

Disclaimer

This material is provided for informational and educational purposes only and should not be construed as personalized investment, tax, legal, or financial planning advice. The information presented is general in nature and may not be applicable to your individual circumstances.

Examples included in this article are hypothetical and are provided solely to illustrate planning concepts. They do not represent any actual client and are not intended to predict or guarantee future results. Investment return assumptions used in these illustrations are hypothetical, do not reflect the performance of any specific investment, and actual results will vary.

Contribution limits, tax rules, and retirement plan regulations are subject to change and vary based on individual factors. O’Keefe Stevens Advisory does not provide legal or tax advice. Readers should consult with their tax advisor, attorney, or financial advisor before implementing any retirement plan or tax strategy.

Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.

Advisory services offered through O’Keefe Stevens Advisory, an investment adviser registered with the U.S. Securities & Exchange Commission. Registration with the SEC does not imply a certain level of skill or training.