SEP IRA Guide for the Self-Employed

by Sudarsan

Saving for retirement as a business owner can be a real challenge. When you are first starting out, you may find that most of your profits go back into the business. Turning around and putting profits in other fund buckets can be a big change.

What is a SEP IRA?

All spelled out, a Simplified Employee Pension Individual Retirement Account is a traditional retirement account in that it is funded with pretax dollars. If you are a business owner, you can set up a SEP for yourself as the owner, but your employees cannot participate in this fund.

How do I know if a SEP IRA is right for me?

To ensure that a SEP will work for you, it is important to consider what this fund will not allow. You cannot make more than $290,000 and use this fund. You also cannot borrow from this retirement account as you would a qualified retirement plan. 

How a Simplified Employee Pension (SEP) Works

One of the benefits of this fund is that the startup costs are quite low. While a 401(k) can have some high administrative costs, even a solo 401(k), a SEP IRA has few customization options, so the fees are lower.

SEP IRA contribution limits

The first thing to note is that these contribution limits have changed every year since at least 2016. Do not limit your contribution options until you meet the broker who will help you set up your account. 

As of 2021, you can put up to 25% of your net profits into your SEP IRA. If your income is below 125,000 for a single person or $198,000 for a couple, you can also set up a traditional IRA. 

Both the SEP and the traditional IRA are funded with pretax dollars. If you expect your income to go up in retirement by selling your business and living off the payments, talk to your broker about the benefits and restrictions of a Roth IRA.


The SEP-IRA has similar restrictions to the traditional and the Roth. You cannot take the money out until you are 59 and a half. If you take the money out before that age, you will have to pay a ten percent penalty. Again, the dollars in your SEP IRA will be taxed as income when you take your money out of it.

SEP IRA vs. Traditional IRA vs. Roth IRA

When considering how to set up a SEP IRA for the self-employed, it is a good idea to keep an eye on changing regulations. According to the experts at SoFi, “one of the significant benefits of a SEP IRA over a traditional or a Roth is that the contribution limit is not tied to a set dollar amount. Instead, your contributions are limited only by the net profits generated by your business up to $58,000 in 2021.”

Building a healthy and secure retirement will take a strong bank account. If you have always worked for yourself, the tax break of a SEP IRA can be a great option once your business is producing steady profit.

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