SEP-IRA — The Self-Employed Retirement Account You Can Open Until Tax Day
What Is It?
A Simplified Employee Pension IRA (SEP-IRA) lets self-employed individuals and small business owners contribute up to 25% of net self-employment income — up to $69,000 in 2024 — to a tax-deferred retirement account. Contributions are fully deductible as a business expense, reducing your taxable income dollar-for-dollar.
The key advantage over other retirement accounts: you can open a SEP-IRA and make contributions for a prior tax year all the way until your tax filing deadline, including extensions. This makes it one of the few retirement accounts you can use retroactively to reduce last year’s tax bill.
2024 Contribution Limits
- Maximum contribution: $69,000 (2024) / $70,000 (2025)
- Contribution rate: Up to 25% of net self-employment income (after deducting half of self-employment tax)
- No catch-up contributions: Unlike IRAs or 401(k)s, there is no additional catch-up contribution for those 50 and older
How to Calculate Your Contribution
The math is slightly circular because the deduction for half of self-employment tax affects your net earnings, which in turn affects the contribution:
Step 1 — Calculate net self-employment income. Start with your Schedule C (or K-1) net profit.
Step 2 — Subtract half of your self-employment tax. SE tax is 15.3% of net profit; you deduct half (7.65%). Multiply your net profit by 0.9235, then by 0.153, divide by 2.
Step 3 — Multiply by approximately 20%. The effective contribution rate for sole proprietors is ~20% of net profit (not 25%) because of the circular adjustment. An IRS worksheet in Publication 560 walks through the exact calculation.
Example: $100,000 net SE income → ~$18,587 in SE tax → half is ~$9,293 → net earnings for SEP = $90,707 → 25% = $22,677 maximum contribution.
Step 4 — Confirm the dollar cap. Your contribution cannot exceed $69,000 (2024) regardless of income.
How to Open One
Any major brokerage offers a SEP-IRA with no annual fees:
- Fidelity, Vanguard, Schwab, or TD Ameritrade — all offer SEP-IRAs at no cost
- Fill out a brief online application (takes 10–15 minutes)
- Fund the account by the tax filing deadline — typically April 15, or October 15 with a filed extension
You do not need to file any IRS paperwork to establish a SEP-IRA (unlike a Solo 401(k), which requires a plan document). Simply complete the brokerage’s adoption agreement and fund the account.
The Tax Deadline Advantage
Unlike a 401(k) or Solo 401(k) — which must be established by December 31 of the tax year — you can open and fund a SEP-IRA for a prior tax year up until your tax return filing deadline (including extensions).
This means if you had a strong self-employment year and realize in February that you owe significant taxes, you can open a SEP-IRA and fund it with the prior year’s allowable contribution amount, reducing your taxable income for that year retroactively.
For S-corp owners: contributions must be made through the business payroll, and the timing rules are slightly different — consult a tax professional.
SEP-IRA vs. Solo 401(k)
| Feature | SEP-IRA | Solo 401(k) |
|---|---|---|
| 2024 contribution max | $69,000 | $69,000 |
| Employee contribution (elective deferral) | No | Yes ($23,000 / $30,500 at 50+) |
| Better for low income? | No | Yes — can contribute more at lower income levels |
| Setup paperwork | Minimal | Requires plan document |
| Roth option | No | Yes (at many custodians) |
| Deadline to establish | Filing deadline (incl. extensions) | December 31 of the tax year |
| Loan provision | No | Optional |
Bottom line: At incomes above $150,000–$200,000, the SEP-IRA and Solo 401(k) reach the same dollar cap. At lower incomes, the Solo 401(k)‘s employee deferral component lets you contribute more. For simplicity and flexibility, most solo self-employed individuals prefer the SEP-IRA until they have enough income to benefit from the Solo 401(k)‘s higher contributions at mid-range incomes.
Employee Coverage Requirements
If you have employees — even part-time — who meet the eligibility requirements, you must contribute the same percentage of their compensation to their SEP-IRA accounts as you contribute for yourself. Eligibility rules: employees who are 21 or older, have worked for you in at least 3 of the last 5 years, and earned at least $750 in the current year.
This “cannot favor the owner” rule is why many small businesses with employees prefer the Solo 401(k) (which covers only the owner and a spouse) or a traditional 401(k) plan with discrimination testing.
What Most People Don’t Know
- You can have both a SEP-IRA and a traditional IRA in the same year. However, the SEP-IRA may affect the deductibility of your traditional IRA contribution if your income is above the IRA phase-out thresholds.
- S-corp owners contribute based on W-2 wages, not business profit. If you own an S-corp, your SEP contribution is 25% of your W-2 salary from the business — not 25% of total business profit. This is a common error.
- You can roll a SEP-IRA into a Solo 401(k) later. If you eventually want a Roth option or loan provision, roll the SEP-IRA assets into a Solo 401(k) plan at any major brokerage.
Frequently Asked Questions
I filed my return already but haven’t contributed to a SEP-IRA. Can I still do it for last year?
If you filed for an extension and the extension deadline hasn’t passed, yes. If you filed your return without an extension and the April 15 deadline has passed, it’s too late for that tax year.
Can I contribute to both a SEP-IRA and a 401(k) at a day job in the same year?
Yes, with important limits. Your total contributions to all defined contribution plans in a year cannot exceed $69,000 (2024). If you contribute $23,000 to your employer’s 401(k), your SEP-IRA contribution is capped at $46,000. This is a combined per-year limit across all DC plans.
Does a SEP-IRA have RMDs (required minimum distributions)?
Yes. SEP-IRAs are treated like traditional IRAs for RMD purposes. You must begin taking RMDs starting at age 73 (under the SECURE 2.0 Act schedule). Unlike a Roth IRA, a SEP-IRA does not escape RMDs.
Can I convert my SEP-IRA to a Roth IRA?
Yes. A SEP-IRA can be converted (fully or partially) to a Roth IRA at any time. The converted amount is added to your taxable income for the year of conversion. This is a common strategy for self-employed individuals in lower-income years.