Contribution Limits
In 2025, the maximum contribution to a SEP IRA is the lesser of 25% of compensation or $70,000. For sole proprietors or single-member LLCs, the effective limit is closer to 20% of net self-employment income, due to how self-employment taxes are calculated. One of the key advantages of a SEP IRA is that the contribution limit is significantly higher than that of Traditional or Roth IRAs. This makes it particularly useful for high earners who want to defer more income for retirement while reducing their current-year taxable income. Contributions are tax-deductible for the business and are not included in the employee’s income until withdrawn. Business owners can decide how much to contribute each year—or whether to contribute at all. This flexibility allows contributions to align with cash flow, profitability, or year-end tax planning needs. However, if a business has employees who meet certain eligibility criteria (typically age 21 or older, earning $750 or more, and having worked for the company in at least three of the past five years), the same percentage contribution must be made for all eligible employees.Taxation
SEP IRAs follow the same tax rules as Traditional IRAs. Contributions are made on a pre-tax basis and grow tax-deferred until withdrawn in retirement. Distributions are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% early withdrawal penalty unless an exception applies. Like other traditional retirement accounts, SEP IRAs are subject to Required Minimum Distributions (RMDs) starting at age 73 (or 75 for those born in 1960 or later). Because of this, they’re not typically used as legacy vehicles, but they can be combined with other planning strategies, such as Roth conversions, to mitigate long-term tax impact.Why Consider a SEP IRA?
For solo business owners, contractors, and high-income self-employed professionals, a SEP IRA provides a simple and effective way to save for retirement while reducing taxable income, amongst other strategies. It’s easy to set up, inexpensive to maintain, and highly flexible regarding contributions. It also works well in tandem with other retirement accounts, like a Roth IRA or taxable brokerage account, for those seeking tax diversification.
When discussing with our eligible clients, we recommend SEP IRAs for those in transition—such as those who’ve left a corporate role to consult independently or those who are winding down a business and looking to make a final contribution before retirement. In the right context, a SEP IRA can be a powerful and underutilized tool in a retirement planning toolkit.
