What is a SEP IRA and how does it work?

A SEP IRA is a type of retirement account designed for small businesses and self-employed individuals. It has relatively high contribution limits and allows employers to set aside money on a tax-deferred basis for retirement.

What is the contribution limit to a SEP IRA?

The contribution limit to a SEP IRA in 2026 is 25% of each employee's compensation or $72,000, whichever is lower. This limit is adjusted by the IRS each year to keep up with inflation.

Is it better to have a SEP IRA or a 401(k)?

There are advantages and disadvantages to both SEP IRA and 401(k) accounts. For example, 401(k) accounts allow for employees to contribute to their own accounts, while SEP IRA accounts are exclusively funded by employers. 401(k) accounts may also permit owners to borrow from their accounts. On the other hand, SEP IRAs allow for withdrawals at any time for certain reasons, such as paying for college.

At what age can you withdraw from a SEP IRA?

The age at which you can withdraw from a SEP-IRA is 59 1/2 years old, with a few exceptions. For example, IRS rules allow for IRA withdrawals at any time to help pay for college expenses.

How Does a SEP IRA Work? | The Motley Fool

Simplified Employee Pensions (SEP) IRAs

By Matthew Frankel, CFP – Updated Feb 6, 2026 at 12:50 PM EST | Fact-checked by Margo Winton Parodi

Key Points

SEP IRAs allow small business owners to save for retirement; contributions are 100% employer-funded.
SEP IRA investments grow tax-deferred, with Roth options available under Secure Act 2.0.
Contributions for each employee must be equal, percentage-wise, to what is given to others.

A SEP IRA is a special type of retirement account designed for small business owners and their employees, as well as self-employed individuals.

"SEP" stands for "Simplified Employee Pension," and "IRA" is short for "Individual Retirement Account." SEP IRAs can help self-employed individuals and small business owners save for retirement in a tax-advantaged manner.

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An infographic explaining what SEP (simplified employee pension) IRAs are and how they work. — Image source: The Motley Fool

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What is a SEP IRA?

A SEP IRA is a type of retirement plan that enables small business owners, along with their employees, to save money for retirement. Like other IRAs, SEP IRAs are fully owned and controlled by the beneficiary of the account.

While SEP IRAs are available to businesses of any size, they're best suited for the self-employed or businesses with very few employees. An employer that establishes a SEP IRA is responsible for 100% of the contributions and must provide equal benefits to all eligible employees.

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How does a SEP IRA work?

Individual employees do not make contributions to a SEP IRA. Instead, the company owner contributes all the funds into the employees' accounts.

As a percentage, contributions to the SEP IRA of each owner and employee must be equal. If an employer contributes to his or her own SEP IRA an amount equivalent to 10% of their annual compensation, then the employer must contribute for each employee an amount equal to 10% of the employee's salary.

The funds in a SEP IRA are owned and managed by the individual employee. There is no vesting requirement like many 401(k) plans have.

Most SEP IRAs have the same investment, distribution, and rollover rules as traditional IRAs, with investments in SEP IRAs increasing on a tax-deferred basis until the owner withdraws from the account. However, under new Secure Act 2.0 rules, you can make Roth (post-tax) contributions to a SEP IRA and receive post-tax withdrawals in retirement.

Individuals are required to pay taxes on their withdrawals in retirement from a SEP IRA. Just as with a traditional IRA, SEP IRA withdrawals are treated as ordinary income for tax purposes. Early withdrawals, or those taken before the age of 59 1/2, are subject to an additional 10% penalty on the amount withdrawn. SEP IRA holders must take required minimum distributions (RMDs) starting at age 73.

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Learn more

Understand all the rules for SEP IRAs

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Investment options with SEP IRAs

SEP IRA owners have relatively few restrictions on the types of securities they can hold in their account. Collectibles and life insurance, for example, are not permitted by the Internal Revenue Service (IRS), but these asset types are unlikely to appeal to most investors. The IRS also prohibits investors from using their SEP IRA funds to trade derivatives with undefined or unlimited risk.

The specific investment options available to each SEP IRA holder vary depending on where the account is held. Most brokerages permit SEP IRA owners to buy and sell most securities and financial instruments, including stocks, bonds, exchange-traded funds (ETFs), mutual funds, money market funds, and certificates of deposit (CDs). Some brokerages restrict certain types of trading activity, such as options trading.

Who's eligible for a SEP IRA

You are eligible to establish a SEP IRA if you're either self-employed or a business owner. If you have employees, they are considered by the IRS as "eligible" for a SEP IRA if they meet these criteria:

Are at least 21 years old
Have worked for the company in three of the past five years
Receive at least $750 in compensation in 2025 and 2026

All eligible employees must have SEP IRAs established for them. While an employer may set less strict eligibility requirements, the same requirements must apply equally to all owners and employees of a company. A business owner can change a company's eligibility criteria at any time provided that the criteria is at least as strict as the IRS criteria.

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SEP IRA contribution limits

The per-person annual contribution limit for a SEP IRA is the lesser of:

25% of the business owner or employee's compensation, or
$70,000 in 2025 or $72,000 in 2026

That's a lot more than the $7,500 standard contribution limit for an IRA in 2026. An employer can also opt not to fund a SEP IRA in a given year provided that all owners and employees receive equal treatment.

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Combining a SEP IRA with other retirement accounts

If you have a SEP IRA, you can still establish other types of retirement accounts. But because a SEP IRA is an employer-sponsored retirement plan, the IRS imposes some additional restrictions on your ability to contribute to other retirement funds.

SEP IRAs combined with traditional IRAs

If you participate in a SEP IRA, you can still open a traditional IRA. But if your employer contributes to your SEP IRA and you earn more than a certain amount of income, your contributions to your traditional IRA are not fully tax-deductible.

For 2025, the tax deduction starts phasing out when your modified adjusted gross income reaches $79,000 for individuals and $126,000 for people married filing jointly. In 2026, these thresholds increase to $81,000 for single filers and $129,000 for married couples filing a joint tax return.

SEP IRAs combined with Roth IRAs

You can establish a Roth IRA even if you participate in a SEP IRA. The maximum amount that you are annually allowed to contribute to a Roth IRA is unaffected by holding any employer-sponsored plan such as a SEP IRA. However, the ability to contribute to a Roth is restricted for all high earners.

SEP IRAs combined with 401(k)s

You are unlikely to have a SEP IRA and a 401(k) from the same employer since the annual contribution limits for employers apply to both types of accounts combined. If you have two separate jobs offering two retirement plans, you can fully participate in both employer-sponsored retirement plans. You can have a SEP IRA at one job and a 401(k) at the other.

SEP IRAs combined with HSAs

You can contribute to both a SEP IRA and a health savings account (HSA). SEP IRA contributions don't affect HSA contribution limits or the tax treatment of HSA contributions. If your employer offers both a SEP IRA and an HSA and contributes matching funds to the HSA, those HSA funds are not counted as income to you as an employee.

How to open a SEP IRA

Opening a SEP IRA is very simple. Most banks and brokerages offer a pre-approved SEP IRA plan prototype that meets IRS standards. The IRS also offers business owners the option of using its own model SEP or a custom plan.

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SEP IRA FAQs

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About the Author

Matt Frankel, CFP®, is a contributing Motley Fool stock market analyst specializing in the real estate and financial sectors. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, Globe St, The National Desk, and other TV networks and publications for his real estate, financial, stock market, and investing expertise.

TMFMattFrankel

@MattFrankelUSC

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Simplified Employee Pensions (SEP) IRAs

Key Points

What is a SEP IRA?

How does a SEP IRA work?

Investment options with SEP IRAs

Who's eligible for a SEP IRA

SEP IRA contribution limits