SEP IRA (Simplified Employee Pension)

First Seen: May 2012 · Established: 1978 Revenue Act · Status: Self-employed retirement vehicle

Overview

SEP IRA is retirement plan for self-employed individuals and small business owners allowing contributions up to 25% of net self-employment income (max $66,000 in 2023).

Best for: Freelancers, consultants, gig workers, small business owners with no employees (or willing to contribute for all employees)

Contribution Limits

2023 max: Lesser of $66,000 or 25% of compensation
Self-employed calculation: 25% of (net profit - half of self-employment tax)

Example: $100K net profit → ~$18,500 SEP IRA contribution

Advantages

High contribution limits: 10x Traditional/Roth IRA ($6,500 vs $66,000)
Simple setup: No annual filings (unlike Solo 401(k) which requires 5500-EZ)
Flexible contributions: Can vary year to year (contribute $66K one year, $0 next)
Tax-deductible: Reduces self-employment tax burden

Disadvantages

Employer contributions only: No employee deferrals (unlike Solo 401(k))
No Roth option: Traditional IRA equivalent only (taxed at withdrawal)
Employee requirements: If you have employees, must contribute same percentage for all
RMDs: Required minimum distributions at age 73

SEP IRA vs Solo 401(k)

SEP advantages: Simpler paperwork, flexible contributions
Solo 401(k) advantages: Higher contribution limits (employee + employer = $66K), Roth option, loan provision

Most common choice: Self-employed with no employees → Solo 401(k) (more features). Small businesses with employees → SEP IRA (easier administration).

Sources

• IRS SEP IRA guidelines
• r/selfemployed discussions
• Bogleheads wiki