Why Every Self-Employed Business Owner Should Consider a SEP IRA

If you’re a business owner or solo entrepreneur, retirement planning can feel like juggling flaming swords; figuring out how much to save, when you can save it, how much to reinvest back into your business, and how to minimize taxes all at the same time. That’s exactly where a SEP IRA can come in as one of the simplest and most powerful retirement tools available.

A SEP IRA (Simplified Employee Pension Individual Retirement Account) is built for people who own their own business and want both tax savings today and tax-deferred growth for the future. Let’s look at why it might be a great fit for you.

What Is a SEP IRA, Really?

At its core, a SEP IRA is a retirement account funded entirely by your business.

Unlike a personal IRA where you make contributions with after-tax dollars, a SEP IRA is funded by employer contributions: your business makes contributions on behalf of eligible employees (including yourself if you’re self-employed). Every dollar the business puts in is tax-deductible, and the money grows tax-deferred until you withdraw it in retirement.

Here’s the part many people love most:
There’s no requirement to contribute every year. You decide how much to contribute based on profits and cash flow. That makes it flexible for business owners who see fluctuating income.

The Big Benefit: Generous Contribution Limits

SEP IRAs allow much higher contributions than traditional IRAs.

For the 2026 tax year, the contribution limit is:
✔ Up to 25% of compensation, or
✔ $72,000, whichever is less ﹘ this is the top amount you could save in one year.

By comparison, traditional and Roth IRAs are capped around $7,500 (under age 50) or $8,600 (age 50+) in 2026.

Because SEP IRA contributions come from your business, they don’t count against the personal IRA limit, meaning you could also be contributing to other retirement accounts at the same time.

Who Looks Like the Perfect SEP IRA Candidate?

Let’s make this real with an example:

Meet Riley, a solo business owner who runs her own marketing consulting firm.

• She earns $150,000 in net income from the business

• She has no employees

• Her business is profitable, and she wants to save aggressively for retirement

With a SEP IRA in place, Riley could contribute up to 25% of her eligible net earnings, up to the 2026 limit of $72,000, into her SEP IRA. Based on Riley’s profit, she could contribute up to $37,500. Every dollar she contributes reduces her business taxable income this year, saving her taxes today while growing her nest egg for tomorrow.

Additionally, those contributions in her SEP IRA will be tax-sheltered while they grow until retirement. That means no taxable income and no capital gains taxes on any growth inside the account.

Over time, those tax deductions combined with tax-deferred growth can make a meaningful difference in her long-term retirement security.

How SEP IRA Contributions Work for Business Owners

A few key rules that every business owner should know:

1. Contributions are employer-funded.
As the business owner, you decide each year whether to contribute and how much (up to the limits). Since employees can only receive contributions at the same percentage as your own, this matters if you have staff.

2. Everyone eligible must be treated fairly.
If you do contribute, you must contribute the same percentage of compensation for all eligible employees. Eligibility generally means someone who:

• Is 21 or older

• Has worked with the company for at least 3 of the last 5 years

• Earns at least a minimum amount set by the IRS ($800 in 2026)

3. You can contribute late.
One of the nicest features of a SEP IRA is that you can open the plan and make contributions up until your business tax filing deadline, including extensions. This can give you time to assess profits before deciding how much to save.

Why Self-Employed Business Owners Love SEP IRAs

There are several reasons SEP IRAs are a go-to option for solo business owners:

✔ Big Tax Deduction Today
Contributions reduce your taxable business income, often meaning you pay less in taxes now while building your retirement fund.

✔ Flexible Contributions
Unlike some retirement accounts, you don’t need to contribute every year. If cash flow is tight in a given year, you can choose to contribute less, or skip it altogether.

✔ Simple Administration and Low Cost
SEP IRAs are easier to set up and maintain than other business retirement plans like 401(k)s and often have no or minimal costs to maintain.

✔ Immediate Vesting
As soon as contributions are made, they’re fully vested,; meaning the money belongs to the SEP IRA owner outright right away, with no waiting period.

What to Watch Out For

While SEP IRAs are powerful, there are a few things to consider:

Not Great for Lots of Employees
If your business has many eligible employees, matching the same percentage of contributions for everyone can become expensive.

No Catch-Up Contributions
Unlike other plans, SEP IRAs don’t allow separate catch-up contributions for owners over age 50. And no “super” catch-up contributions like 401k plans offer for those age 60-63.

Early Withdrawals Still Penalty-Prone
If you take money out before age 59½, expect taxes and potential penalties just like other traditional retirement accounts.

SEP IRA vs Other Small-Business Plans

A quick comparison:

• Solo 401(k): Allows higher contributions for some business structures and includes employee salary deferrals.

• Simple IRA: Easier for small businesses with employees, but lower contribution limits.

• SEP IRA: Simpler, especially if you have no or few employees.

Each has its place, but SEP IRAs are often a great balance of simplicity + power for self-employed owners.

Final Takeaway

A SEP IRA isn’t just another retirement account. For business owners who want to save aggressively, reduce their tax bill, and keep things simple, it’s one of the smartest tools available.

If you’re making consistent profit from your business and want a retirement savings strategy that grows with you, a SEP IRA deserves serious consideration.

Do you want to work with a financial planner who can help you evaluate your biggest financial decisions from the perspective of what has the best chance of funding your best life? Reach out and schedule a free consultation.

This article is for educational purposes and does not constitute personalized financial advice. Always consult a qualified financial advisor before implementing complex financial strategies.