If you’re a business owner or self-employed, you might be wondering how to save for retirement in a way that’s both tax-efficient and easy to manage.
When you start looking into all the different retirement plan options for business owners, you may feel overwhelmed with the range of accounts available. While we briefly review the four most common retirement plan options in our retirement planning tips for business owners blog, here we drill down deeper into SEP IRAs.
In this article, we walk you through what a SEP IRA is, who it’s most suitable for, how to set one up, as well as sharing the latest SEP IRA contribution limits for 2025.
What Is a SEP IRA?
A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a retirement plan designed specifically for small business owners or self-employed individuals. It allows you to contribute toward your own retirement and your employees’—if you have any—with minimal administrative hassle.
Unlike other retirement plan options for business owners, SEP IRAs offer significant advantages for business owners who face unpredictable income. In years when profits are strong, employers can maximize their contributions, potentially building a larger retirement nest egg.
Conversely, during leaner times, the flexibility to reduce or skip contributions altogether without the need to close the plan provides a valuable cushion. This adaptive approach helps balance the demands of running a business with long-term financial planning.
SEP IRA Contribution Limits 2025
If you open a SEP IRA, you can contribute up to 25% of each eligible employee’s compensation, including your own, up to $70,000 per person in 2025. This is significantly higher than the contribution limits for Traditional or Roth IRAs, which are capped at $7,000 (or $8,000 for those over age 50).
Contributions must come solely from the employer—employees do not contribute—and you have until your business’s tax filing deadline (including extensions) to make contributions. This makes SEP IRAs a flexible and tax-efficient way to save more aggressively when business income allows.
What kind of business owners are SEP IRAs suitable for?
Whether you’re flying solo or managing a small team, SEP IRAs offer a low-maintenance way to invest in your future while potentially reducing your current tax burden. Here are three types of business owners who can benefit most from a SEP IRA:
1. Self-Employed Individuals
When your entire business depends on you, finding time for retirement plan research isn’t always easy. A SEP IRA comes in handy by offering high potential contributions (versus a Traditional IRA or Roth IRA), plus the chance to lower your tax bill right now. If you want to explore more ways entrepreneurs minimize taxes, check out our top 5 strategies to reduce taxes as a business owner.
2. Small Teams
If you run a tight-knit company, you might appreciate the simplicity of covering your employees without diving into the complexities of a 401(k). Contributions to a SEP IRA are percentage-based. Suppose you contribute 10% of your own compensation to your SEP IRA—that same 10% applies to each eligible employee’s pay. This uniformity can build goodwill among staff.
3. Owners Concerned About Ease of Administration
Not every business owner wants—or needs—the complexity of a full-blown 401(k) plan. Filing annual forms and performing discrimination tests can be tedious. SEP IRAs involve less red tape: no annual filing with the IRS and no separate trust for plan assets. For entrepreneurs who’d rather focus on business tasks, that alone can be a major plus.
Pros and Cons of a SEP IRA
Having a balanced view of the pros and cons of a SEP IRA helps you figure out whether this option suits your short-term goals and eventual business evolution.
Advantages of a SEP IRA
Let’s start with a few reasons why SEP IRAs can be a great solution for business owners:
- You fund it, on your terms: SEP IRA contributions are made by the employer only. You decide how much to put in—up to 25% of each eligible employee’s compensation, including your own, capped at $70,000 for 2025.
- Adjust contributions year-to-year: Had a strong year? Max out contributions. Revenue took a dip? You can scale back or skip contributions without penalty.
- Less paperwork, less stress: When it comes to the administrative side of things, SEP IRAs are much easier to set up and maintain than a 401(k) plan. There are no annual filing requirements, and the setup can often be completed through your existing financial institution. You can typically open a SEP IRA with your local financial advisor or through an online brokerage firm.
- Business deductions now: Every dollar you contribute to a SEP IRA is typically tax-deductible as a business expense. That means you’re not just saving for the future, but also potentially lowering your taxable income today.
- Tax-deferred growth: Once the money is in the account, it grows tax-deferred, just like with a traditional IRA or 401(k). That means no taxes on interest, dividends, or capital gains year to year. You don’t pay taxes until you start withdrawing the money in retirement—ideally when you’re in a lower tax bracket.
- No payroll taxes on contributions: SEP IRA contributions are not considered wages, so you don’t owe Social Security, Medicare, or FUTA taxes on the amounts you contribute for yourself or your employees.
- High contribution limits, high savings potential: Because the SEP IRA contribution limit is much higher than a traditional IRA or Roth IRA, you can shift more income into a tax-advantaged account—especially helpful for high earners or profitable businesses looking to keep more of what they earn.
Disadvantages of a SEP IRA
Here are some reasons why business owners would consider other retirement plan options besides a SEP IRA:
- Equal % contributions required: You must contribute the same percentage of pay for all eligible employees—including yourself. While this is also technically an advantage, if you’re trying to keep costs down, having to contribute an equal percentage of pay to everyone can add up quickly as your team grows.
- Employees can’t contribute: Unlike a 401(k) or SIMPLE IRA, where employees can make elective deferrals from their paycheck, SEP IRAs are employer-funded only. If your team values the ability to save more for retirement directly, a SEP IRA may feel limited from their perspective.
- No Roth version: SEP IRAs follow traditional IRA tax rules, which means there’s no Roth version. All contributions are pre-tax, and withdrawals in retirement are taxed as ordinary income. If you or your employees are looking to diversify your retirement tax strategy with Roth contributions, you’ll need to explore other plan types.
- Limited customization for employees: Because SEP IRAs are uniform and employer-controlled, they don’t allow for features like different contribution levels, employee vesting schedules, or loan provisions. If you’re aiming to use your retirement plan as a strategic recruiting or retention tool, a 401(k) plan may give you more flexibility.
While SEP IRAs can be a smart choice for many business owners, they’re not the only option on the table. Let’s take a look at how they stack up against other popular retirement plans.
Comparing SEP IRAs to Alternatives
Traditional and Roth IRAs vs. SEP IRA
While SEP IRAs can only be opened by business owners, traditional and Roth IRAs are available to anyone with earned income and offer flexibility in individual investing. Compared to a SEP IRA, their annual contribution limits are much lower (around $7,000, or $8,000 for those over 50).
SIMPLE IRA vs. SEP IRA
There is no limit to the number of employees you can have when using a SEP IRA. SIMPLE IRAs, on the other hand, are designed for small businesses with up to 100 employees and allow both employer and employee contributions. They feature a lower employee deferral limit (about $16,500 or $20,000 for those over 50 in 2025) and require mandatory employer contributions—either matching or non-elective. This can make SIMPLE IRAs more attractive for owners who want to offer employees a way to save directly from their paychecks without committing to large employer-only contributions.
401(k) Plans vs. SEP IRA
A traditional 401(k) plan offers the benefits of both employer and employee contributions, higher elective deferral limits, and often an employer match that can boost retirement savings. However, 401(k) plans tend to involve more complex administration, compliance testing, and higher costs. For business owners who prefer an easier-to-manage plan with robust contribution limits, a SEP IRA is an appealing alternative—especially if your workforce is small or non-existent. 401(k) contribution limits in 2025 are $23,500 for those under 50 – click here to see 401(k) contribution limits in 2025 for those over 50.
Solo 401(k) Plan vs. SEP IRA
Solo 401(k) plans are designed for self-employed individuals or business owners with no full-time employees (other than a spouse). They allow for both employee deferrals and employer contributions, making it possible to contribute more than a SEP IRA at lower income levels. Unlike SEP IRAs, Solo 401(k)s also offer Roth contribution options and the ability to take loans from the plan. While the setup and maintenance are more involved than a SEP IRA, the added flexibility and higher savings potential make Solo 401(k)s a strong choice for high-earning solopreneurs.
Defined Benefit Plans vs. SEP IRA
Defined benefit plans (also known as pension plans) allow business owners to contribute much higher amounts—often $100,000 or more per year—depending on age, income, and years until retirement. These plans are ideal for high-income earners looking to rapidly build retirement savings in a tax-advantaged way.
Click here to learn more about cash balance plans as a retirement planning tool for small business owners and physicians.
Defined benefit plans, however, come with strict annual funding requirements and require actuarial calculations, making them significantly more complex and expensive to maintain than a SEP IRA.
How to Set Up a SEP IRA in 5 Steps
1. Choose a Financial Institution
Most banks and brokerage firms offer SEP IRAs. Look for investment options and fee structures that align with your risk tolerance and the level of service you expect.
2. Complete the Plan Agreement
Many institutions use the IRS’s Form 5305-SEP as a base. You won’t typically file this form with the IRS; instead, you keep it on record.
3. Inform Eligible Employees
Transparency matters. Each employee should know how contributions are calculated and when deposits will be made. Even though they don’t contribute personally, awareness fosters trust.
4. Open SEP IRA Accounts
You’ll open a separate SEP IRA account for each eligible staff member. This is where you’ll deposit the employer contributions.
5. Make SEP IRA Contributions
You can contribute to the SEP IRA at any time during the tax year, up to your filing deadline (plus extensions). The flexible timing can help if you prefer to wait until you have a clearer picture of your profits.
Can You Contribute to Other Retirement Plans in addition to a SEP IRA?
Business owners can indeed have additional retirement plans alongside a SEP IRA. The IRS permits individuals to participate in more than one retirement vehicle, but it’s important to understand how the rules interact, especially regarding contribution limits and tax deductibility.
- Contribution Limit Interactions:
- Employer Contributions: When using multiple employer-sponsored plans (for example, a SEP IRA and a 401(k)), the contributions your business makes on behalf of employees—including yourself—are subject to an overall limit. The IRS requires that you calculate these contributions on an aggregated basis, ensuring that you do not exceed the allowed percentage of compensation or the dollar limits set by law.
- Employee Salary Deferrals: In the case of plans like a Solo 401(k), employee salary deferral contributions are treated separately from employer contributions. This means you can potentially contribute to both a SEP IRA (as an employer contribution) and a 401(k) (as both an employee and employer contribution), provided that you adhere to the distinct limits for each component.
- Employer Contributions: When using multiple employer-sponsored plans (for example, a SEP IRA and a 401(k)), the contributions your business makes on behalf of employees—including yourself—are subject to an overall limit. The IRS requires that you calculate these contributions on an aggregated basis, ensuring that you do not exceed the allowed percentage of compensation or the dollar limits set by law.
- Strategic Tax Planning:
Having more than one retirement plan allows you to diversify the types of contributions (employer versus employee) and may help you maximize your tax deductions. For example, while contributions to a SEP IRA are generally deductible as a business expense, a Solo 401(k) offers the added benefit of salary deferral contributions that reduce your taxable income even further. - Plan Eligibility and Testing:
It’s important to note that if you have non-owner employees, additional testing (such as non-discrimination testing) may be required to ensure that contributions are allocated fairly. This can influence your choice if you’re considering adding another plan on top of a SEP IRA.
Coordinating multiple plans can be a smart way to boost retirement savings, but it’s essential to understand the rules—or work with a financial advisor—to avoid costly mistakes.
Final Thoughts: Is a SEP IRA Right for You?
A SEP IRA can be a powerful piece of your retirement strategy—especially if you’re focused on simplicity, flexibility, and high contribution limits. But it’s just one part of a bigger picture. If you’re planning to eventually sell or exit your business, your retirement savings will play a key role in funding life after business ownership. Aligning your SEP contributions with long-term goals like succession planning or a business sale can strengthen your overall financial position.
For many business owners, setting up a SEP IRA is only the beginning. It’s also important to think about personal risk tolerance, family needs, estate planning, and how everything fits together. Revisiting your retirement strategy regularly helps ensure you’re covering all the bases—from tax efficiency to legacy planning.Every business is different, and so are your financial goals. A SEP IRA might be the right move, or it might work better as part of a broader retirement or tax strategy. Schedule a call with our financial advisors in Tampa today to get personal guidance for your situation.
