An SEP account is a retirement savings account designed for self-employed people and small business owners

SEP stands for Simplified Employee Pension. It is a retirement account that lets you set aside money for retirement with tax advantages. Unlike a regular savings account, contributions to an SEP reduce your taxable income for the year you make them. The money grows tax-deferred, meaning you do not pay taxes on investment gains until you withdraw the money in retirement.

An SEP is not a separate type of bank account—it is a retirement plan structure. You open it through a bank, brokerage, or investment firm, and it holds stocks, bonds, mutual funds, or other investments. The main appeal is that you can contribute much more per year than you can to a regular IRA, and the setup is simpler than a solo 401(k).

SEPs are most common among freelancers, contractors, and people who own their own business. If you have employees, you can have an SEP, but you must contribute the same percentage of salary for each employee as you do for yourself—which is why many solo operators choose an SEP over other plans.

Key Takeaways

  • An SEP lets self-employed people and small business owners save for retirement with contributions that reduce their taxable income for that year.
  • You can contribute up to 25% of your net self-employment income (or up to a maximum of $69,000 per year as of 2024, though this limit changes annually) to an SEP.
  • An SEP is simpler to set up and maintain than a solo 401(k) and does not require annual tax filings like some other retirement plans.
  • If you have employees, you must contribute the same percentage of compensation for them as you do for yourself, which can make an SEP expensive if you have staff.

How much you can contribute each year

The amount you can put into an SEP depends on your net self-employment income. You can contribute up to 25% of your net self-employment income, but there is an annual cap. The cap changes each year based on inflation. For 2024, the maximum contribution is $69,000. For 2025, it is $70,000. Check the IRS website or your plan provider for the current year's limit.

Net self-employment income is your business profit minus half of your self-employment tax. If you earned $100,000 in net profit, you would calculate your maximum contribution based on that $100,000 figure, not the full amount. The exact calculation depends on your business structure and income, so many people work with a tax professional to get it right.

You can contribute different amounts each year. If business is slow one year, you can contribute less or nothing at all. If business is strong, you can contribute more (up to the annual limit). This flexibility is one reason self-employed people prefer SEPs to plans with fixed annual contributions.

When you open an SEP and when you contribute

You can open an SEP at any time during the year, but contributions for a given tax year must be made by the tax filing deadline for that year—usually April 15 of the following year (or October 15 if you file an extension). This means you can open an SEP in March 2025 and still make a contribution for the 2024 tax year, as long as you do it before the April 2025 deadline.

Many self-employed people open an SEP in December or January to plan for the coming year. Others wait until after they know their final income for the year, then open the account and make their contribution before the tax deadline. Both approaches work.

Once the account is open, you can contribute annually. You do not have to contribute every year—if you have no income or choose not to set aside money one year, you simply skip that year's contribution. There is no penalty for not contributing.

SEP accounts versus other retirement plans for self-employed people

A solo 401(k) (also called a one-participant 401(k)) allows higher total contributions than an SEP in some cases, but it requires more paperwork and annual tax filings. A solo 401(k) is better if you have significant income and want to maximize retirement savings. An SEP is simpler if you want to minimize administrative work.

A Simple IRA is another option for self-employed people and small businesses. It has lower contribution limits than an SEP (up to $16,000 per year for 2024, plus catch-up contributions if you are over 50), but it is also simpler to maintain. A Simple IRA makes sense if you have a few employees and want to offer them a retirement plan without the complexity of a 401(k).

A regular Traditional IRA or Roth IRA has much lower contribution limits (up to $7,000 per year for 2024) and is designed for employees, not self-employed people. If you are self-employed, an SEP or solo 401(k) will let you save significantly more for retirement.

How taxes work with an SEP

Contributions to an SEP reduce your taxable income for the year you make them. If you contributed $20,000 to an SEP and earned $100,000 in business income, your taxable income would be $80,000. This lowers your federal income tax bill for that year.

The money in the SEP grows tax-free while it sits in the account. You do not pay taxes on investment gains, dividends, or interest until you withdraw the money. This tax deferral is a major advantage—your money compounds faster because taxes are not eating into the growth each year.

When you withdraw money from an SEP in retirement, those withdrawals are taxed as ordinary income at your tax rate at that time. If you withdraw $50,000 from your SEP in a year when you have little other income, you pay tax on that $50,000 at your current tax rate. The idea is that your tax rate will be lower in retirement than it was while you were working, so you save money overall.

Withdrawal rules and early access

You can withdraw money from an SEP anytime, but if you withdraw before age 59½, you generally owe a 10% early withdrawal penalty plus income tax on the amount withdrawn. There are some exceptions—for example, if you become disabled or face a financial hardship—but they are narrow and require documentation.

You must start taking withdrawals from your SEP by April 1 of the year after you turn 73 (this age changed from 72 in 2023). These are called required minimum distributions (RMDs). The IRS calculates how much you must withdraw each year based on your age and account balance. If you do not take the required amount, you owe a penalty.

If you have employees and leave your business, the SEP stays in place. You can continue to make contributions if you have self-employment income from other work, or you can leave the money to grow until retirement.

Setting up an SEP: what you need

Opening an SEP is straightforward. You contact a bank, brokerage, or investment firm and ask to open an SEP account. They will ask for your Social Security number, business information, and details about any employees. You sign an adoption agreement—a document that outlines the terms of the plan. Most providers have simple forms you can complete online or on paper.

You do not need a lawyer or accountant to open an SEP, though consulting a tax professional can help you understand how much you can contribute and how it affects your taxes. The setup typically takes a few days to a week.

If you have employees, you must notify them that you have established an SEP and tell them how much you will contribute on their behalf. You do not need their permission, but they need to know the plan exists.

Frequently Asked Questions

Can I have both an SEP and a regular IRA?

Yes. You can have an SEP and a Traditional IRA or Roth IRA at the same time. However, if you have a Traditional IRA and contribute to an SEP, your Traditional IRA contributions may not be tax-deductible, depending on your income. Consult a tax professional about how this affects your specific situation.

What happens to my SEP if I sell my business?

The SEP account remains yours. The money does not go to the buyer of the business. You can continue to make contributions if you have other self-employment income, or you can leave the account alone and let it grow until retirement. You can also roll it into another retirement account if you wish.

Do I have to contribute to an SEP every year?

No. Contributions are optional. If you have a slow year or no income, you can skip that year's contribution with no penalty. This flexibility is one advantage of an SEP over plans with mandatory contributions.

Can I withdraw money from my SEP to pay business expenses?

You can withdraw money, but it counts as a distribution and you owe income tax on it. If you are under 59½, you also owe a 10% early withdrawal penalty unless an exception applies. It is not a loan—you cannot borrow from an SEP and pay it back like you can with some 401(k) plans.

What if I have employees—do I have to set up an SEP?

No. An SEP is optional. However, if you do set one up and have employees, you must contribute the same percentage of compensation for each employee as you contribute for yourself. This can be expensive, which is why some business owners with staff choose a Simple IRA or 401(k) instead, or no retirement plan at all.