The SEP IRA is one of the most powerful retirement savings tools available to self-employed workers and small business owners, offering contribution limits significantly higher than individual IRAs and a simpler administration structure than a 401(k). These seven facts help self-employed workers understand what they are working with and how to use it effectively.
1. The Contribution Limit Is Much Higher Than a Standard IRA
A standard IRA allows contributions up to $7,000 per year for those under 50. A SEP IRA allows contributions up to 25 percent of net self-employment income, with a maximum of $69,000 for 2024. This dramatically higher ceiling makes the SEP IRA the primary retirement savings vehicle for high-earning self-employed workers who want to shelter a significant portion of income from current taxation.
2. How Much Should I Contribute to My IRA?
SoFi’s sep ira contribution to calculator calculates your maximum allowable SEP IRA contribution based on your net self-employment income after the self-employment tax deduction. The calculation is more complex than it appears because the contribution is calculated as a percentage of net income after deducting the contribution itself, which creates a circular calculation that the tool handles automatically.
The calculator also shows the tax savings from the contribution at your marginal tax rate, which makes the real-world value of maximizing the SEP contribution concrete.
3. Contributions Are Tax-Deductible
SEP IRA contributions are deductible from federal income taxes in the year they are made, which reduces taxable income dollar for dollar up to the contribution limit. For self-employed workers in higher tax brackets, the tax savings from maximizing SEP contributions can be substantial.
4. You Have Until the Tax Filing Deadline to Contribute
Unlike 401(k) contributions, which must be made by December 31 of the tax year, SEP IRA contributions can be made up to the tax filing deadline including extensions. This gives self-employed workers who do not know their final net income until tax preparation is complete the flexibility to make contributions after the year ends.
5. You Can Have a SEP IRA and Other Retirement Accounts
Having a SEP IRA does not prevent you from also having a traditional or Roth IRA, though income limits and the deductibility of traditional IRA contributions are affected by participation in an employer plan. Working with a tax professional to understand how these accounts interact is valuable for maximizing the total retirement savings benefit.
6. The Account Is Simple to Open and Maintain
SEP IRAs have minimal administrative requirements compared to other employer retirement plans. There are no annual IRS filing requirements for the plan itself, no complex discrimination testing, and no minimum funding obligations. The simplicity makes it appropriate for sole proprietors and small business owners who want meaningful retirement savings without administrative burden.
7. Employees Must Be Covered If You Have Them
If you have employees who meet the eligibility requirements, a SEP IRA requires that you contribute the same percentage of compensation for them that you contribute for yourself. This means the SEP IRA works most cleanly for sole proprietors. Business owners with employees should evaluate whether a solo 401(k) or SIMPLE IRA provides better flexibility for their specific situation.
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