A Simplified Employee Pension is a retirement account that lets self-employed people and small business owners set aside money for retirement with less paperwork than a traditional pension plan

A Simplified Employee Pension (SEP) is an Individual Retirement Account (IRA) that your employer — or you, if you're self-employed — can contribute to on your behalf. The main draw is simplicity: you don't file annual forms with the IRS, you don't need a plan document, and the contribution limits are higher than a regular IRA. If you work for yourself or own a small business, a SEP lets you put away a meaningful amount of pre-tax money without the administrative burden of a 401(k) or traditional pension.

The trade-off is flexibility. Once you set up a SEP, you can change how much you contribute each year — or skip contributions entirely in a lean year. But you cannot borrow from it, and you cannot make loans to yourself the way some 401(k) plans allow. If you have employees, you must contribute the same percentage of salary for them that you contribute for yourself, which is why many small owners choose a SEP only when they have no staff.

Key Takeaways

  • A SEP is an IRA that allows much higher annual contributions than a regular IRA — currently up to 25% of net self-employment income or a set dollar limit that changes yearly.
  • You can set up a SEP with a bank or brokerage in under an hour, with no IRS filing requirement and no annual compliance forms.
  • If you have employees, you must contribute the same percentage of their salary that you contribute for yourself, which makes a SEP impractical for most businesses with staff.
  • Money in a SEP grows tax-deferred, and you pay income tax only when you withdraw it in retirement, typically after age 59½.
  • A SEP is best suited to solo self-employed people, freelancers, and very small business owners with no employees or only a handful of part-time workers.

How much you can contribute each year

The contribution limit for a SEP changes annually and depends on your net self-employment income. For 2024, you can contribute up to 25% of your net self-employment income, or a maximum of $69,000 — whichever is lower. The dollar limit increases most years to keep pace with inflation, so check the current year's limit before you plan your contribution.

If you have employees, the math is the same for them: you contribute the same percentage of their salary that you contribute for yourself. So if you contribute 15% of your own income, you must contribute 15% of each employee's salary. This is why many business owners with staff choose a different retirement plan structure.

You can change your contribution percentage from year to year. In a profitable year, you might contribute 20%. In a slow year, you can contribute nothing. This flexibility is one reason self-employed people favor a SEP over a solo 401(k), which requires you to make contributions if you have self-employment income.

Setting up a SEP and the paperwork involved

You open a SEP by going to a bank, credit union, brokerage, or investment firm and asking for a SEP-IRA application. They provide the paperwork — usually a form called a SEP-IRA adoption agreement — which you sign. The whole process takes less than an hour. You do not file anything with the IRS to establish it.

If you have employees, you must give each one a copy of the SEP-IRA disclosure document and tell them about the plan. You do not need their permission to set one up, but they do need to know it exists and understand the terms. Keep records of who received the disclosure and when.

After you set up the SEP, you contribute money by the tax deadline for that year — usually April 15 of the following year, or October 15 if you file an extension. You do not file Form 5500 or any other annual compliance form with the IRS. This is the biggest administrative advantage over a 401(k) or traditional pension plan.

SEP contributions and taxes

Money you contribute to a SEP reduces your taxable income for that year. If you contribute $20,000 to a SEP and earn $80,000 in self-employment income, you report only $60,000 as taxable income. This lowers your federal income tax bill and, in most states, your state income tax as well.

The money inside the SEP grows without being taxed each year. If you invest in stocks that gain value or bonds that pay interest, you do not pay tax on those gains until you withdraw the money. This tax deferral is what allows retirement savings to compound over decades.

When you withdraw money from a SEP after age 59½, you pay ordinary income tax on the full amount withdrawn — both your contributions and all the growth. If you withdraw before 59½, you typically owe income tax plus a 10% early withdrawal penalty, with some exceptions for hardship or disability.

When a SEP makes sense versus other retirement plans

A SEP is the simplest choice if you are self-employed with no employees, or if your only staff are family members or part-time workers you do not want to cover. The low setup cost, no annual filing, and high contribution limits make it ideal for freelancers, consultants, and solo business owners.

A solo 401(k) (also called a one-participant 401(k)) may be better if you want to borrow from your retirement savings or if you have variable income and want more control over contributions. A solo 401(k) has higher administrative costs and requires annual filing, but it offers more flexibility in how and when you contribute.

A SIMPLE IRA works better if you have a small number of employees and want to offer them a retirement plan without the complexity of a 401(k). With a SIMPLE, employees can contribute their own money, and you make smaller required employer contributions — usually 2% or 3% of salary.

If you have multiple employees and want to offer a robust retirement benefit, a traditional 401(k) or defined-benefit pension plan may be the right fit, even though they cost more to set up and maintain.

Required minimum distributions and withdrawal rules

Once you reach age 73, you must begin taking required minimum distributions (RMDs) from your SEP each year. The IRS calculates the minimum based on your age and account balance. If you do not take the full RMD, you owe a 25% penalty on the shortfall (reduced to 10% if you correct it within two years).

You can withdraw money from a SEP anytime, but withdrawals before age 59½ trigger the 10% early withdrawal penalty in most cases. Exceptions include disability, medical expenses above a certain threshold, and a few other narrow situations. If you need access to your money before retirement, a SEP may not be the right choice.

If you are still working and earning self-employment income, you can continue to contribute to a SEP past age 73, even while taking RMDs. The RMD applies only to the balance in the account at the end of the prior year.

SEP accounts if you change jobs or retire

If you leave self-employment or close your business, your SEP stays with you. The money remains invested and continues to grow tax-deferred. You can roll it into another IRA or a 401(k) at a new employer if you want to consolidate accounts, though rolling into another IRA is simpler and does not require the new employer's permission.

If you become an employee at another company and that company offers a 401(k) or pension plan, you can keep your SEP separate or roll it into the new plan if the plan allows it. There is no requirement to merge them, and keeping them separate can make sense if you want to preserve investment choices or lower fees.

When you retire, you withdraw from your SEP like any other IRA. You can take as much or as little as you want each year (after age 59½), as long as you meet the required minimum distribution once you turn 73. Many retirees take withdrawals gradually to spread out the tax impact.

Frequently Asked Questions

Can I have both a SEP and a regular IRA at the same time?

Yes, but your combined contributions to both accounts cannot exceed the annual limit for a SEP. If you contribute $30,000 to a SEP, you can contribute only what remains of the SEP limit to a regular IRA that year. Most people with a SEP skip the regular IRA to keep things simple.

What happens to my SEP if I die?

Your SEP becomes part of your estate and passes to your beneficiaries according to your will or the beneficiary designation on the account. Beneficiaries must pay income tax on withdrawals, but they can stretch withdrawals over time to reduce the tax burden in any single year, depending on their relationship to you and current tax law.

Can I borrow money from my SEP?

No. Unlike some 401(k) plans, a SEP does not allow loans. If you need cash, your only option is to withdraw money, which triggers income tax and potentially the 10% early withdrawal penalty if you are under 59½.

Do I have to contribute to a SEP every year?

No. You can contribute in profitable years and skip contributions in slow years. This flexibility is one reason self-employed people choose a SEP over a solo 401(k), which requires contributions if you have self-employment income.

What if I hire an employee after I set up my SEP?

You must include the new employee in the SEP and contribute the same percentage of their salary that you contribute for yourself. If this creates a burden, you can close the SEP and switch to a SIMPLE IRA or solo 401(k) that offers more flexibility with employees.