Qualifying
What is a SEP-IRA?
A SEP-IRA (Simplified Employee Pension) is a retirement account self-employed people and small business owners can contribute to. Contribution limits are far higher than a traditional IRA — up to 25% of compensation or $69,000 for 2024 — and contributions are tax-deductible.
The full picture
A SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement) is a type of traditional IRA designed for self-employed people, freelancers, and small business owners. It allows much higher contributions than a standard IRA, and contributions are tax-deductible in the year they're made. Earnings grow tax-deferred until withdrawal.
How much can you contribute to a SEP-IRA?
For 2024, you can contribute the lesser of 25% of compensation or $69,000 to a SEP-IRA. If you're self-employed, the IRS uses a slightly different formula — roughly 20% of net self-employment income after deducting self-employment tax. You can use IRS Publication 560 to calculate the exact deductible amount. Contributions must be made by your tax-filing deadline, including extensions.
SEP-IRA vs. traditional IRA: what's different?
A traditional IRA caps contributions at $7,000 per year ($8,000 if you're 50 or older) for 2024. A SEP-IRA's $69,000 ceiling makes it the preferred vehicle for high-earning self-employed individuals who want to shelter significant income. The mechanics at withdrawal are the same: distributions in retirement are taxed as ordinary income, and required minimum distributions (RMDs) begin at age 73.
Who qualifies — and what about employees?
Any individual with self-employment income qualifies — sole proprietors, single-member LLCs, S-corp owners, and partners. If you have employees, the rules require you to contribute the same *percentage* of compensation for eligible employees as you contribute for yourself. That's why many small business owners with employees evaluate a solo 401(k) instead, which is available only when there are no common-law employees. The IRS SEP-IRA overview has the eligibility rules in full.
- 2024 contribution limit: lesser of 25% of compensation or $69,000.
- Contributions are tax-deductible; growth is tax-deferred until withdrawal.
- No Roth SEP-IRA option — all SEP-IRAs are traditional (pre-tax).
- Employers must contribute the same percentage for all eligible employees.
- Deadline to contribute: tax-filing deadline including extensions.
What the IRS says
- For 2024, SEP-IRA contributions are limited to the lesser of 25% of the employee's compensation or $69,000. — IRS
- Self-employed individuals calculating their SEP-IRA deduction use a special computation because compensation is net earnings from self-employment reduced by the deductible part of self-employment tax. — IRS Publication 560
- An employer who adopts a SEP must make contributions for all eligible employees at the same percentage rate. — IRS
Key takeaways
- SEP-IRAs are designed for self-employed people and small business owners — contribution limits are nearly 10x a traditional IRA.
- Contributions are tax-deductible in the year made; earnings grow tax-deferred.
- If you have employees, you must contribute the same percentage for them as you contribute for yourself.
- Contributions can be made up to your tax-filing deadline, including extensions — useful if your income varies year to year.
- Compare with a solo 401(k) if you have no employees and want to make additional employee-side contributions.
Published 2026-05-22 · Updated 2026-05-22 · https://clearvaluelending.com/answers/what-is-a-sep-ira