Unfortunately, retirement planning is one of those things that just gets pushed to the back burner when you’re running a business. Between chasing clients, putting out fires, and handling payroll, the idea of setting up a retirement plan sounds pretty boring… and exhausting.
That’s exactly why the SEP IRA exists.
Short for Simplified Employee Pension, a SEP IRA is the business owner’s version of an “easy button” for retirement. It’s designed to be simple, flexible, and tax-friendly. No mountains of paperwork or complicated rules.
If you’re self-employed or run a business with just a few employees, a SEP IRA might be the smartest move you can make to lower your tax bill and grow a serious nest egg.
So today, I’m trying to break it down in plain English. No jargon. No fluff. No mumbo-jumbo. Just real, actionable insight into what a SEP IRA is, how it works, and how you can use it to your advantage.
Let’s get cooking, preferably with bacon grease.
What Is a SEP IRA?
A SEP IRA is a retirement plan designed for small business owners, freelancers, and self-employed individuals. It works kind of like a traditional IRA, but it allows for much larger contributions. And the sweet sauce? Those contributions are made entirely by the employer.
That’s right: you, the business owner, make all the contributions. There are no employee deferrals like in a traditional or Solo 401(k). Just you (as the employer) putting money away for yourself and, if applicable, your eligible employees.
Why would you want to do that?
Because every dollar you contribute to a SEP IRA is a tax-deductible business expense. That means you’re not only saving for the future and you’re cutting your tax bill… today.
And here’s the best part: SEP IRAs are ridiculously easy to set up. No annual filings. No complicated administration. No compliance testing. Just open an account, make your contributions, and move on with your day.
SEP IRA vs. Traditional 401(k): What’s the Difference?
Traditional 401(k) plans are built for larger companies with multiple employees and come with heavy administrative requirements, including annual nondiscrimination testing and complex reporting.
SEP IRAs? None of that.
With a SEP IRA, you don’t have to deal with plan documents, IRS forms, or plan testing. You simply:
- Set up the account (which takes about 15 minutes).
- Decide how much you want to contribute (up to the annual limit).
- Make the contributions from your business account.
That’s it. Done.
Also, unlike a traditional 401(k), there’s no Roth option in a SEP IRA. Every contribution is pre-tax, meaning you’ll get a deduction now, but you’ll pay taxes later when you withdraw the money in retirement.
And remember: only the employer contributes. If you’re a solo business owner, that’s easy. If you have employees, however, you must contribute the same percentage of compensation for each eligible employee as you do for yourself.
That’s where strategy becomes important, especially when you’re deciding between a SEP IRA and something like a Solo 401(k) or a Safe Harbor 401(k).
Who Can Use a SEP IRA?
The SEP IRA is a great fit for any business owner with no employees or with a few employees they want to contribute for.
Think:
- Freelancers
- Consultants
- Independent contractors
- S-Corp or LLC owners
- Small business owners with one or two staff member (especially family)
You can even have side income from a sole proprietorship and open a SEP IRA just for that income stream. Even if you’re already participating in a 401(k) with your day job. That’s a huge benefit for high-income earners with multiple revenue sources.
Please Note: If you have eligible employees – those 21 and older, working for you for 3 out of the last 5 years, and earning over $750 (2025 threshold) – you’ll need to contribute for them at the same percentage as you contribute for yourself.
And those contributions? They’re immediately 100% vested. That means the money belongs to the employee the moment it hits their account.
2025 Contribution Limits
Let’s talk numbers, because this is where SEP IRAs shine.
For 2025, you can contribute up to 25% of your compensation, up to a maximum of $70,000. That’s the same total cap as a Solo 401(k), but without the employee deferral component.
Here’s how it plays out:
If you’re self-employed and your business income (after expenses) is $100,000, you can contribute roughly $20,000 to $25,000, depending on your net self-employment calculation (because you must subtract self-employment taxes before calculating contributions).
If your W-2 salary through an S-Corp is $150,000, your SEP contribution cap would be $37,500 (25% of $150K).
There’s no catch-up contribution allowed for those 50 and older in a SEP IRA – unlike a Solo 401(k), which lets you add more if you’re in the “retirement red zone.”
Real-Life Example
One of my clients runs a small drone photography agency. No employees. Just him, a laptop, a couple of drones, and about $200K a year in net income from consulting and affiliate work.
He didn’t want the complexity of a 401(k). He just wanted a way to reduce taxes.
We set him up with a SEP IRA, and he contributed $50,000 in the first year. This was just shy of the 25% limit based on his self-employment income.
That $50,000 became a deduction against his business income, which cut his tax bill by roughly $15,000. Pretty sweet, huh?
All of that money is now growing tax-deferred in a low-cost index fund portfolio. And it took him less than 20 minutes to set up and fund the account.
SEP IRA vs. Solo 401(k): Which One Should You Choose?
This is where things get interesting.
If you’re solo and want the highest possible contributions, the Solo 401(k) usually wins. That’s because it allows you to contribute as both an employee and an employer, which helps you reach the $70K cap faster, especially at lower income levels.
But if you’re looking for simplicity, a SEP IRA is tough to beat.
No special filings. No annual reports. No testing. It’s literally a “set it and forget it” retirement tool.
The SEP IRA can also be useful if you have unpredictable income and want flexibility. You don’t have to contribute every year, and there are no required minimums.
Can You Invest in Real Estate or Alternative Assets Through a SEP IRA?
Yes… but you’ll need to go the self-directed route.
Just like with a Solo 401(k), you can set up a self-directed SEP IRA through a custodian that allows alternative assets. That means you could invest in:
- Rental properties
- Private notes
- Cryptocurrency
- Precious metals
- Private businesses
But there are strict IRS rules around what you can and can’t do with those assets.
You can’t use the property yourself, you can’t buy assets from or sell to a family member, and you can’t lend money to yourself through the IRA.
Still, if you follow the rules and work with a good custodian, a self-directed SEP IRA opens the door to far more than just stocks and bonds.
Common SEP IRA Mistakes to Avoid
A few traps to watch out for:
Missing the deadline. You can set up and fund a SEP IRA until your tax-filing deadline, including extensions. That gives you a lot more breathing room than other retirement plans—but only if you remember to take action.
Not factoring in employee eligibility. Many business owners don’t realize that a part-time worker from three years ago might now qualify. If you skip contributions for an eligible employee, you may face IRS penalties and required corrections.
Overlooking coordination with other plans. If you’re contributing to a 401(k) at your W-2 job and a SEP IRA on your side hustle, know that the limits are separate, but only for the employer contributions. Make sure you’re not double-dipping on deferrals if you also have a Solo 401(k).
Forgetting the IRA rules. SEP IRAs are still IRAs at the end of the day, which means the same rules apply to distributions, taxes, and required minimum distributions starting at age 73.
Final Thoughts: Is a SEP IRA Right for You?
If you want a low-maintenance, high-impact retirement plan that helps you cut your taxes and keep things simple, the SEP IRA should absolutely be on your radar.
It’s flexible, generous, and easy to set up, making it a perfect fit for self-employed professionals and small business owners looking to do more with their money.
As always, the key is making sure your retirement plan fits your business structure, your growth plans, and your tax strategy.
Not sure where to begin? I’ve helped entrepreneurs across the country choose and implement the right retirement strategies… without the overwhelming feeling of having to navigate these waters by yourself. I’ll be your captain… for now. Book your free consultation today, and I’ll have you sailing in no time.
Welcome to the New Age of Accounting. Let’s begin.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
