What Is a SEP IRA?

Research. Education. Perspective.

Difficulty: Foundation Reading time: 18 minutes Last reviewed: August 10, 2026

> Educational Resource > > This article explains Simplified Employee Pension plans and SEP-IRAs under general federal rules. It does not recommend establishing a SEP, contribution percentage, Roth election, retirement-plan provider, investment, rollover or tax strategy for any particular reader or business.

Executive Summary

A Simplified Employee Pension, or SEP, is an employer-sponsored retirement arrangement that allows an employer to make contributions to individual retirement accounts established for eligible employees.

Investor.gov describes a SEP IRA as a structure that allows an employer—often a small business or self-employed individual—to contribute to a traditional IRA established in the employee's name.^[9]

The IRS describes the SEP itself as the plan.

The separate IRA receiving the money is the SEP-IRA.^[1][3]

That distinction matters.

A SEP can be used by:

• Sole proprietors
• Partnerships
• Corporations
• Other eligible employers
• Self-employed individuals with no employees^[1]

For 2026, employer contributions to an employee's SEP-IRA generally cannot exceed the lesser of:

• 25% of the employee's compensation, or
• $72,000.^[2][4][7]

The amount of compensation that can be considered for the contribution calculation is limited to $360,000 for 2026.^[4][7]

A standard SEP is primarily an employer-funded structure.

IRS guidance states that ordinary SEP plans do not permit employee elective salary deferrals or catch-up contributions.^[2][6]

The employer can generally decide each year whether to contribute, including making no contribution, subject to the plan document. But if the employer contributes, the allocation generally must bear a uniform relationship to compensation for eligible employees.^[3]

SEP contributions are immediately 100% vested.^[3]

Key Takeaways

• A SEP is the employer plan; a SEP-IRA is the individual IRA that receives plan contributions.^[1][3]
• Self-employed people can establish a SEP for themselves.^[1]
• The 2026 maximum contribution for an employee is generally the lesser of 25% of compensation or $72,000.^[2][7]
• Only compensation up to $360,000 is considered for the 2026 contribution calculation.^[4][7]
• The 2026 minimum-compensation threshold in the standard SEP eligibility framework is $800.^[7]
• Ordinary SEP contributions are employer contributions, not employee salary deferrals.^[2][6]
• Standard SEPs do not provide age-50 catch-up contributions.^[2][6]
• Employer contributions can generally be discretionary from year to year, including zero.^[3]
• Contributions generally must bear a uniform relationship to employee compensation.^[3]
• SEP contributions are always 100% vested.^[3]
• A self-employed owner's contribution requires a special calculation.^[4][5]
• SECURE 2.0 permits employers maintaining SEPs to offer participating employees a Roth SEP option.^[8]
• A SEP-IRA does not protect investments from market loss.

What Is a SEP?

The IRS defines a Simplified Employee Pension plan as a retirement arrangement through which an employer contributes on a tax-favored basis to IRAs owned by employees.^[1][3]

The name describes the plan's relative administrative simplicity compared with many conventional qualified retirement plans.

> ROIStreet Definition > > A SEP is an employer-sponsored retirement plan that uses individually owned IRAs to receive employer retirement contributions for eligible participants.

SEP vs. SEP-IRA

The terms are often used interchangeably.

Technically:

SEP

The employer's retirement plan or arrangement.

SEP-IRA

The IRA established for an eligible employee to receive contributions under the SEP.

If a business has five eligible employees, there can be five separate SEP-IRAs receiving contributions under one SEP plan.

The employee owns the IRA.

The employer operates the plan.

Who Can Establish a SEP?

The IRS states that a business of any size can establish a SEP, including a self-employed person.^[1]

Common users include:

• Sole proprietors
• Independent contractors
• Small professional practices
• Partnerships
• S corporations
• C corporations
• Businesses with a small number of employees

The structure is particularly associated with small employers because it can have relatively low administrative complexity.^[1]

Self-Employed People Can Be Participants

For retirement-plan purposes, a self-employed owner can occupy two roles:

• Employer
• Employee

The business establishes the SEP.

The owner receives an employer contribution through a SEP-IRA.

This is why the phrase employer contribution still applies when a sole proprietor is contributing for themselves.

How Is a SEP Established?

An employer generally needs:

1. A written SEP agreement
2. Information provided to eligible employees
3. A SEP-IRA established for each eligible employee^[1][3]

The employer may use:

• IRS Form 5305-SEP when eligible
• A prototype SEP offered by a financial institution
• An individually designed SEP document^[1]

The actual IRA accounts are maintained through financial institutions.

SEP Establishment Deadline

One feature of a SEP is the relatively flexible establishment deadline.

IRS Publication 560 states that a SEP can generally be established as late as the due date of the employer's income-tax return, including extensions, for the year for which the contribution is made.^[4]

Contribution deadlines are generally coordinated with the employer's tax-return filing deadline, including extensions, subject to the applicable tax rules.^[4]

This differs from retirement plans that may require earlier establishment or employee elections.

2026 SEP Contribution Limit

For 2026, IRS guidance states that contributions for an employee generally cannot exceed the lesser of:

25% of compensation

or

$72,000.^[2][7]

These are maximum legal limits.

A SEP does not require the employer to contribute the maximum.

The $72,000 Figure Is Not Automatic

Consider an employee earning $100,000.

Twenty-five percent is:

$25,000

The maximum under the percentage test would therefore be $25,000, not $72,000.

Now consider an employee earning $360,000.

Twenty-five percent is:

$90,000

But the 2026 dollar ceiling is:

$72,000

So the contribution cannot exceed $72,000.

The maximum is always governed by the applicable lower limit.

2026 Compensation Limit

The amount of employee compensation that can be considered for SEP contribution purposes is limited.

For 2026:

$360,000.^[4][7]

Compensation beyond that amount generally cannot be used to calculate a larger SEP contribution.

This is one reason the 25% formula does not produce unlimited contributions for very highly paid employees.

Employer Contributions Are Discretionary

IRS guidance states that a SEP contribution can be discretionary, including zero.^[3]

A business can therefore potentially:

• Contribute one year
• Contribute a different percentage the next year
• Make no contribution in another year

subject to the written allocation formula and applicable rules.

This flexibility can be useful for businesses with variable profitability.

But Employee Treatment Must Follow the Plan

Discretionary does not mean the owner can freely favor themselves.

When contributions are made, SEP allocation rules generally require contributions to bear a uniform relationship to compensation.^[3]

IRS guidance explains that this commonly means the contribution for each eligible employee represents the same percentage of compensation.^[3]

Example

Suppose a business elects a 10% SEP contribution.

Owner compensation:

$150,000

Employee A:

$60,000

Employee B:

$40,000

A simple uniform-percentage allocation would produce:

• Owner: $15,000
• Employee A: $6,000
• Employee B: $4,000

subject to the plan document and legal limits.

The business cannot ordinarily use a standard uniform SEP formula to contribute 10% for the owner and 0% for otherwise eligible employees.

Employer-Funded Means Employer-Funded

A standard SEP differs from a 401(k) or SIMPLE IRA because employees generally do not elect salary reductions into the SEP.

IRS guidance states:

Elective salary deferrals and catch-up contributions are not permitted in standard SEP plans.^[2]

There is a historical exception for certain grandfathered SARSEPs established before 1997.

New employers generally cannot establish a SARSEP today.^[2]

No Age-50 SEP Catch-Up

Because ordinary SEP contributions are employer contributions rather than employee elective deferrals, there is no standard SEP age-50 catch-up contribution.^[2][6]

The employer contribution limit remains the SEP limit.

A participant might separately be eligible to make a regular traditional or Roth IRA contribution under the ordinary IRA rules, but that is legally different from the SEP employer contribution.^[4][6]

SEP Contributions and Regular IRA Contributions

IRS Publication 560 states that employer SEP contributions do not by themselves eliminate an individual's ability to make ordinary traditional or Roth IRA contributions if the individual otherwise qualifies.^[4]

The two contribution systems have different limits.

SEP employer contribution

Governed by SEP plan rules.

Personal IRA contribution

Governed by the annual traditional/Roth IRA contribution rules.

However, participation in a SEP can affect the deductibility of a traditional IRA contribution because the participant can be treated as covered by a workplace retirement plan.

Employee Eligibility

A SEP generally must include employees who satisfy the plan's eligibility requirements.

The IRS standard maximum eligibility restrictions allow an employer to require that an employee:

• Has reached age 21
• Has worked for the employer in at least 3 of the last 5 years
• Has received at least the applicable minimum compensation during the year^[3]

For 2026, the IRS COLA table lists the SEP minimum-compensation amount as:

$800.^[7]

An employer may use less restrictive eligibility requirements.

It generally cannot use more restrictive requirements than the law permits.^[3]

The 3-of-5 Rule Is About Service, Not Full-Time Status

The service rule can surprise small-business owners.

IRS guidance explains that the rule focuses on whether the employee performed service during at least three of the preceding five years.

It does not necessarily require:

• Full-time work
• A full year of employment
• 1,000 hours per year

An employee who worked even a relatively short period in three separate qualifying years can potentially satisfy the service condition once the other eligibility requirements are met.^[3]

Permitted Employee Exclusions

Depending on the plan and applicable rules, an employer can generally exclude certain employees, including:

• Employees who have not reached age 21
• Employees who have not satisfied the service requirement
• Employees below the current compensation threshold
• Certain employees covered by a union agreement when retirement benefits were bargained in good faith
• Certain nonresident aliens without U.S.-source compensation from the employer^[3]

The plan document controls which permissible exclusions are actually used.

Part-Time Employees Can Qualify

A part-time employee is not automatically excluded from a SEP.

If the person satisfies:

• Age
• Service
• Compensation

and does not fall within a valid exclusion, the employee can be eligible.

This is one of the most important practical differences between having no employees and having even a small number of recurring employees when evaluating a SEP.

Immediate 100% Vesting

SEP contributions are fully vested immediately.

IRS guidance states that employees are always 100% vested in SEP contributions made to their SEP-IRAs.^[3]

That means an employer cannot use a multi-year vesting schedule requiring an employee to remain for several years before owning the contribution.

Once the money is contributed to the employee's SEP-IRA, it belongs to the employee.

Employees Control Their SEP-IRA Assets

Because contributions go to individually owned IRAs, employees generally control their SEP-IRA investment choices within the provider's available menu.

Potential holdings can include:

• Stocks
• Bonds
• Mutual funds
• ETFs
• CDs
• Cash
• Other investments permitted by the custodian and IRA rules

The employer chooses the SEP structure.

The employee's IRA provider and investment selection determine the actual investment exposure.

No Investment Guarantee

The word pension in Simplified Employee Pension can be misleading.

A SEP does not promise a defined retirement benefit.

The future value depends on:

• Contributions
• Investment returns
• Fees
• Withdrawals
• Time

A SEP-IRA invested in stocks can lose value.

A SEP-IRA invested in bonds can lose value.

Tax advantages do not eliminate market risk.

Self-Employed Contribution Math Is Different

A common mistake is to read:

“SEP contribution up to 25% of compensation”

and assume a sole proprietor can simply multiply Schedule C net profit by 25%.

IRS guidance explains that the self-employed calculation is different.^[5]

Why?

Because the owner's deductible retirement-plan contribution affects the amount treated as plan compensation.

The calculation also reflects the deductible portion of self-employment tax.^[5]

That creates a circular calculation.

Why 25% Can Become 20% for a Self-Employed Owner

For an employee whose compensation is wages, a plan contribution rate of 25% can be applied to eligible compensation.

For a self-employed owner, the corresponding reduced contribution rate is commonly 20% of adjusted net earnings from self-employment when the plan's stated contribution rate is 25%.^[4][5]

The exact calculation starts with net earnings from self-employment and makes required adjustments.

This is why:

25% of employee compensation

does not mean:

25% of Schedule C profit

for a sole proprietor.

Simplified Self-Employed Example

Assume a sole proprietor has $100,000 of net Schedule C profit before the SEP contribution.

The maximum SEP contribution is not automatically $25,000.

The calculation must first account for the deductible portion of self-employment tax and then apply the reduced self-employed contribution-rate formula.^[5]

The exact result depends on the taxpayer's facts.

IRS Publication 560 includes worksheets for the calculation.^[4]

For educational purposes, the important concept is the circular relationship—not an oversimplified percentage shortcut.

Partnerships

Partners are also treated as self-employed individuals for retirement-plan contribution purposes.

Their SEP contribution calculations generally use self-employment earnings rather than ordinary employee W-2 wages.

The partnership typically calculates and deducts employer retirement-plan contributions under partnership tax rules.

Because partner compensation and self-employment calculations can be technical, partnership SEP contributions often require tax-preparer coordination.

S Corporation Owners

An S corporation owner who is an employee generally uses eligible W-2 compensation for SEP contribution calculations.

S corporation distributions are not automatically treated as plan compensation.

That distinction can matter materially.

A shareholder receiving:

• W-2 wages
• S corporation distributions

should not assume the contribution percentage applies to both categories.

The plan's compensation definition and applicable tax rules control.

C Corporation Owners

A shareholder-employee of a C corporation can generally participate based on eligible compensation paid by the corporation under the plan.

The corporation is the employer making the SEP contribution.

Again, ownership of the business does not allow the plan to disregard eligible employee rules.

SEP Contribution Deduction

Employer SEP contributions can generally be deductible by the business within applicable limits.^[1][4]

The deduction belongs to the employer under the relevant tax rules.

For a self-employed person, the deduction is generally reported through the individual's income-tax return rather than as an employee business expense deducted directly from Schedule C profit.

Tax reporting depends on business form.

Tax Treatment to the Employee

Traditional SEP employer contributions are generally not included in the employee's current taxable income when properly made under the plan.^[4]

Investment earnings generally grow tax-deferred while retained in the IRA.

Later distributions are generally taxed under traditional IRA rules to the extent taxable.

This is the conventional SEP structure.

Roth SEP Contributions

SECURE 2.0 changed the historical assumption that SEP contributions could only go into traditional IRAs.

The IRS states that an employer maintaining a SEP can now offer participating employees the option to designate a Roth IRA as the IRA to which SEP contributions are made.^[8]

This is optional.

An employer is not required to offer Roth SEP treatment.

Provider implementation can also matter.

Traditional SEP vs. Roth SEP

Conceptually:

Traditional SEP contribution

The contribution generally receives traditional tax-deferred treatment.

Roth SEP contribution

The contribution is directed to a Roth IRA under the SECURE 2.0 framework and is included in taxable income under the applicable Roth SEP rules.^[8]

Future qualified Roth distributions can then receive Roth tax treatment under applicable rules.

The contribution is still an employer SEP contribution.

It is not the same thing as an employee making an ordinary annual personal Roth IRA contribution.

Roth SEP Does Not Create a Separate Contribution Limit

The SEP contribution ceiling does not double merely because Roth treatment is offered.

Traditional and Roth SEP contributions remain subject to the applicable SEP contribution limits.

For 2026, the core maximum remains the lesser of:

• 25% of applicable employee compensation, or
• $72,000^[2][7]

subject to plan and tax rules.

SEP vs. Traditional IRA

The names are similar because SEP money is held in IRAs.

But the contribution systems differ.

A SEP participant can also potentially make an ordinary personal IRA contribution if otherwise eligible.^[4]

SEP vs. One-Participant 401(k)

A self-employed person with no employees other than a spouse may also evaluate a one-participant 401(k), often called a solo 401(k).

The structures differ.

For a business owner with employees, workforce rules can be more important than the headline maximum contribution.

Why a Solo 401(k) Can Reach a Higher Contribution at Lower Income

A one-participant 401(k) allows an eligible owner to contribute in two roles:

• Employee elective deferral
• Employer contribution^[10]

A SEP generally relies on the employer contribution percentage.

That means at some income levels, a solo 401(k) can permit a larger contribution than a SEP because the employee deferral is added before the employer contribution reaches its percentage limit.

At sufficiently high compensation, both structures can encounter the same general defined-contribution dollar ceiling.

The exact comparison depends on:

• Income
• Age
• Business form
• Other retirement plans
• Plan year
• Eligibility

SEP vs. SIMPLE IRA

A SIMPLE IRA permits employee salary-reduction contributions plus required employer contributions.

A SEP uses employer contributions.

The account names both contain IRA.

The plan mechanics are materially different.

Employee Cost Can Be the Central SEP Tradeoff

A SEP can look exceptionally attractive when evaluating only the owner's potential contribution.

But consider a business with eligible employees.

Suppose the employer wants to make a 20% contribution for the owner.

Under a typical uniform-percentage SEP allocation, eligible employees generally also need a 20% employer contribution based on their eligible compensation.^[3]

That can make the plan expensive.

The relevant question is not merely:

“How much can the owner contribute?”

It is:

“What contribution obligation does the selected percentage create for every eligible participant?”

Example With Employees

Assume:

• Owner compensation: $200,000
• Employee A compensation: $80,000
• Employee B compensation: $50,000
• Employer chooses a 15% uniform SEP contribution

Potential contributions:

Owner:

$30,000

Employee A:

$12,000

Employee B:

$7,500

Total employer contribution:

$49,500

This is a simplified illustration and assumes all compensation is eligible and no special allocation method applies.

It demonstrates why staffing structure matters.

Can the Employer Skip a Year?

A SEP contribution can generally be discretionary, including zero, if the plan document permits.^[3]

A business that has a difficult year may therefore choose not to contribute.

But if the employer contributes for a year, it must follow the plan's allocation formula for eligible employees.

“Discretionary” applies to the employer's annual decision.

It does not create arbitrary participant-by-participant discretion.

Can the Employer Contribute Different Percentages?

IRS guidance states that SEP contributions must generally bear a uniform relationship to compensation.^[3]

A common arrangement uses the same percentage for each eligible participant.

Certain legally permitted allocation approaches can be more complex.

For a standard educational framework, business owners should not assume they can freely choose different contribution percentages for different employees.

The plan document and applicable nondiscrimination rules control.

Loans Are Not Available From a SEP-IRA

IRS guidance contrasts SEPs with certain qualified plans by noting that SEP participants cannot take plan loans.^[3]

A SEP-IRA follows IRA rules.

Borrowing from an IRA is generally prohibited and can create serious tax consequences.

This differs from a 401(k) plan that is designed to permit participant loans.

Withdrawals

Because a SEP-IRA is an IRA, the owner can generally take distributions subject to IRA tax rules.

A distribution does not require the employer's permission in the same way some qualified-plan distributions can be restricted.

But tax consequences can apply.

Traditional SEP-IRA distributions can generally be:

• Taxable as ordinary income to the extent taxable
• Subject to the additional 10% tax on early distributions before age 59½ unless an exception applies

Roth SEP amounts follow applicable Roth IRA rules.

Required Minimum Distributions

Traditional SEP-IRAs are subject to IRA required minimum distribution rules.

The original owner must generally begin RMDs under the age rules applicable to traditional IRAs.

Roth IRA treatment differs.

The fact that the money entered through an employer SEP does not exempt the account from the IRA RMD framework.

Rollovers and Transfers

SEP-IRA assets generally operate within IRA rollover and transfer rules.

Depending on the source and destination, eligible assets can potentially move among:

• SEP-IRA
• Traditional IRA
• Eligible employer plans that accept rollovers

Tax consequences depend on account type and transaction structure.

Roth SEP amounts require Roth-compatible treatment.

SEP-IRA Balances and Roth Conversion Planning

For federal IRA tax calculations, traditional SEP-IRAs are part of the broader traditional IRA universe.

That can matter when an individual has:

• Deductible IRA money
• Nondeductible IRA basis
• SEP-IRA balances
• Roth conversion activity

The federal pro-rata calculation for a Roth conversion can aggregate traditional, SEP and SIMPLE IRA balances.

This is a tax-planning issue rather than a reason for or against a SEP.

It is simply one consequence that can be overlooked when a business owner already uses nondeductible IRA strategies.

Investment Selection

A SEP-IRA can offer broad investment flexibility depending on the custodian.

A brokerage SEP-IRA may offer:

• Stocks
• Bonds
• ETFs
• Mutual funds
• CDs
• Cash
• Other permitted securities

Some custodians offer more limited menus.

The SEP tax rules do not determine the investment menu.

The custodian does.

Self-Directed SEP-IRAs

Some custodians offer self-directed SEP-IRAs that can hold alternative assets.

Potential assets can include:

• Private placements
• Real estate
• Precious metals
• Other permitted alternatives

The same risks discussed for self-directed IRAs apply:

• Fraud
• Illiquidity
• Valuation uncertainty
• High fees
• Prohibited-transaction risk

A custodian's willingness to hold an asset is not an endorsement of the investment.

Prohibited Transactions

SEP-IRAs are subject to IRA prohibited-transaction rules.

Transactions involving improper personal use, self-dealing or certain related parties can create severe tax consequences.

Alternative assets can make these rules especially important because the line between:

• Personal property
• Business property
• IRA property

can become less intuitive.

Professional tax and legal guidance can be important for complex self-directed arrangements.

SEP Fees

Potential SEP costs can include:

• Plan-document or setup fees
• IRA account fees
• Custody fees
• Fund expense ratios
• Advisory fees
• Trading costs
• Self-directed asset fees

The IRS emphasizes that SEP administration can be simpler than conventional retirement plans.^[1]

Simple does not mean free.

The plan layer and investment layer should both be reviewed.

SEP Reporting and Administration

SEPs generally have fewer employer filing requirements than many conventional qualified plans.^[1]

For example, a typical SEP does not require the employer to file an annual Form 5500 solely for the SEP in the way many ERISA retirement plans do.

However, the employer still has responsibilities.

These can include:

• Maintaining a valid plan document
• Identifying eligible employees
• Applying the contribution formula correctly
• Observing annual limits
• Providing required information
• Depositing contributions properly
• Correcting errors

Administrative simplicity does not eliminate compliance.

Common SEP Errors

IRS SEP Fix-It guidance identifies recurring problems including:

• Excluding eligible employees
• Using the wrong compensation
• Miscalculating contributions
• Failing to apply a uniform contribution relationship
• Exceeding contribution limits^[3]

These errors often arise when business owners treat a SEP as though it were simply a personal IRA with a larger limit.

It is an employer plan.

Common Misconceptions

"A SEP IRA is just a personal IRA with a $72,000 limit."

No. The SEP is an employer plan, and the maximum contribution depends on compensation, employee coverage and other rules.^[1][2]

"Employees can contribute from their paychecks."

Not to a standard SEP. Ordinary elective salary deferrals are not permitted.^[2]

"If I own the company, I can contribute for myself and skip employees."

Not generally when employees satisfy the SEP's eligibility rules and a contribution is made under a uniform allocation formula.^[3]

"A sole proprietor can multiply Schedule C profit by 25%."

Not generally. A self-employed owner's contribution requires a special adjusted calculation.^[5]

"$72,000 is the normal SEP contribution."

No. It is the 2026 dollar ceiling. The 25% compensation limit can produce a lower maximum.^[2]

"People over 50 get a SEP catch-up."

Standard SEP employer contributions do not have an age-50 catch-up.^[2][6]

"SEP contributions vest over several years."

No. SEP contributions are immediately 100% vested.^[3]

"I can borrow from my SEP."

No participant loans are permitted from SEP-IRAs.^[3]

"Every employee must be included immediately."

Not necessarily. Permitted age, service, compensation, union and nonresident-alien exclusions can apply.^[3]

"A SEP prevents me from making a regular IRA contribution."

Not necessarily. An individual can potentially make a separate personal IRA contribution if otherwise eligible.^[4]

"A Roth SEP is just another personal Roth IRA contribution."

No. It is a SEP employer contribution directed to a Roth IRA under the SECURE 2.0 framework.^[8]

Frequently Asked Questions

What is a SEP IRA in simple terms?

A SEP is an employer retirement plan that sends employer contributions into IRAs established for eligible employees.^[1][9]

What is the maximum SEP contribution for 2026?

The employer contribution for an employee generally cannot exceed the lesser of 25% of compensation or $72,000.^[2][7]

What is the 2026 SEP compensation limit?

Only up to $360,000 of compensation can generally be taken into account for the SEP contribution calculation.^[4][7]

What is the 2026 minimum compensation for SEP eligibility?

The IRS COLA table lists $800 for 2026.^[7]

Can a self-employed person open a SEP?

Yes. Self-employed individuals can establish SEPs.^[1]

Can employees contribute to a SEP from salary?

Not to an ordinary SEP. Standard SEPs permit employer contributions rather than employee elective salary deferrals.^[2]

Does a SEP have catch-up contributions?

Not under the standard SEP employer-contribution structure.^[2][6]

Can the employer change the contribution percentage each year?

SEP contributions can generally be discretionary, including zero, subject to the written plan terms. When contributions are made, allocation rules apply to eligible employees.^[3]

Does the employer have to contribute for employees?

If eligible employees are covered by the SEP and the employer makes contributions, the employer must follow the plan's allocation formula. Standard SEP contributions generally bear a uniform relationship to compensation.^[3]

Are SEP contributions immediately vested?

Yes.^[3]

Can a SEP IRA have Roth contributions?

SECURE 2.0 permits an employer maintaining a SEP to offer participating employees the option to have SEP contributions made to a Roth IRA, subject to applicable implementation and tax rules.^[8]

Can a SEP IRA invest in stocks and ETFs?

Depending on the custodian, SEP-IRAs can offer investment choices similar to other brokerage IRAs.

Can I borrow from a SEP IRA?

No. SEP-IRAs do not provide participant loans.^[3]

Can I have a SEP and a regular Roth IRA?

Potentially yes, if the individual independently satisfies the ordinary Roth IRA eligibility rules. The contribution systems are separate.^[4]

Is a SEP better than a solo 401(k)?

Neither structure is universally better. Contribution mechanics, employee status, age, administrative complexity, plan features and business income can produce different outcomes.

2026 SEP Rules at a Glance

Annual dollar amounts can change with inflation.

A SEP Research Framework

When evaluating a SEP, useful questions include:

1. What type of business is sponsoring the plan?
2. Is the owner self-employed, W-2 compensated or a partner?
3. Are there any common-law employees?
4. Which employees satisfy the age, service and compensation rules?
5. What eligibility terms does the actual plan document use?
6. What contribution percentage is being considered?
7. What employee contribution cost would that percentage create?
8. What is each participant's eligible compensation?
9. Does the $360,000 compensation cap affect anyone?
10. Does the $72,000 contribution ceiling affect anyone?
11. Has the self-employed owner's contribution been calculated using the proper reduced-rate method?
12. Would a one-participant 401(k) permit different contribution mechanics if there are no employees?
13. Would a SIMPLE IRA better fit a business that wants employee salary deferrals?
14. Does the provider support the desired investment menu?
15. Does the employer intend to offer Roth SEP treatment?
16. What administrative and investment fees apply?
17. Are any employees close to becoming newly eligible?
18. Could traditional SEP-IRA balances affect other IRA tax strategies?

These questions describe the retirement-plan structure without determining which plan is appropriate for a particular business or individual.

The Bottom Line

A SEP is one of the simpler employer retirement-plan structures available to small businesses and self-employed individuals.

Its basic architecture is straightforward:

Employer establishes SEP → eligible participant has SEP-IRA → employer makes contribution → participant owns and invests the account.

For 2026, the employer contribution generally cannot exceed the lesser of:

• 25% of employee compensation, or
• $72,000.^[2][7]

The compensation used for the calculation is generally capped at:

$360,000.^[4][7]

But those headline numbers do not tell the entire story.

A standard SEP also means:

• Employer-funded contributions
• No ordinary employee salary deferrals
• No SEP catch-up contribution
• Immediate 100% vesting
• Employee-eligibility requirements
• Generally uniform contribution treatment
• Special self-employed contribution calculations
• IRA distribution and investment rules

The most important business-owner question is often not:

"How much can I put into a SEP for myself?"

It is:

"Who else must participate, what will the chosen contribution percentage cost across all eligible employees, and how does the SEP's employer-only contribution structure compare with other retirement-plan alternatives?"

That is what turns the SEP from a headline contribution limit into an actual retirement-plan analysis.

Continue Your Learning

1. What Is an IRA? — Understand the IRA framework underlying each SEP-IRA account.
2. What Is a 401(k)? — Compare employee-deferral and employer-contribution mechanics.
3. What Is a 403(b)? — Learn how another employer retirement structure differs.
4. What Is a Brokerage Account? — Understand investment custody inside IRA-based accounts.
5. What Is a Target-Date Fund? — Learn about an investment that can be held inside retirement accounts.
6. What Is Asset Allocation? — Separate the SEP account structure from the portfolio inside it.
7. Compound Growth — Understand how contributions, investment returns and fees interact over time.
8. Risk vs. Return Explained — Understand why tax advantages do not protect investments from market losses.

Sources & References

1. Internal Revenue Service: Simplified Employee Pension Plan (SEP)
2. Internal Revenue Service: SEP Contribution Limits
3. Internal Revenue Service: SEP Plan Fix-It Guide — SEP Plan Overview
4. Internal Revenue Service: Publication 560 — Retirement Plans for Small Business
5. Internal Revenue Service: Calculating Your Own Retirement Plan Contribution and Deduction
6. Internal Revenue Service: Retirement Plans FAQs Regarding SEPs
7. Internal Revenue Service: COLA Increases for Dollar Limitations on Benefits and Contributions
8. Internal Revenue Service: SECURE 2.0 Act Impacts How Businesses Complete Forms W-2
9. U.S. Securities and Exchange Commission — Investor.gov: Individual Retirement Accounts
10. Internal Revenue Service: One-Participant 401(k) Plans

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