Ode to the SEP IRA

Of all the retirement accounts, it’s the easiest to work with.

Key takeaways:

• The SEP IRA is a freelancer and business owners best and easiest way to save for retirement.

• You can apply for a tax filing extension to give you a little more time to sort out how much you actually made in the year and will want to contribute to your SEP IRA.

• Typically, people with a SEP IRA save about 20% of their net income, which can often drop them into a lower their tax bill.

The SEP IRA needs a new publicist. It does not have a podcast and it is not trending on TikTok. No one is selling a course about how to “hack” it. Because it’s not a hack, it’s just smart saving for the future and paying less tax on your business income.

SEP IRAs are for business owners and freelancers. So sadly, if you don’t have any of this type of income (the kind that comes in cash, doesn’t have taxes taken out, and gets reported on a 1099), you aren’t eligible, and I would re-direct you to a 401(k) through your employer or a plain old IRA.

But for my business owners and gig workers the SEP IRA does exactly what you need it to do. It lowers your tax bill. It moves money into retirement. It requires minimal effort. In a world of overcomplicated money advice, the SEP IRA is a welcome reprieve.

I love it. I think it’s the best retirement account for a huge number of people. And I think it deserves its flowers.

What a SEP IRA actually is

SEP stands for Simplified Employee Pension. Straight to business. This is an account that wears sensible shoes and shows up early.

A SEP IRA is a retirement account for people with self-employment or business income. Freelancers. Consultants. Business owners. Anyone earning money outside a W-2 employer retirement plan.

You open it in your own name. It lives at a brokerage company like Vanguard, Fidelity, or Charles Schwab. You invest the money. It grows tax-deferred. You get a tax deduction when you contribute money into the account. Later, in retirement, you’ll pay ordinary income tax when you withdraw the money.

Why it’s special

First, the best feature: you can open an account and contribute money to it after the year is over.

Hopefully, you’ve been a loyal reader of Money Changes Everything for months now and your financial life is already perfectly organized and you don’t do anything last-minute anymore, right? Yeah, right. If you’re like most people and you waited till the last minute to figure out what you’re doing about your retirement savings, with a SEP IRA, that’s okay. It’s almost as if Congress thought, “these are business owners, they are going to be messy, let’s be a little more relaxed about the rules on this one to help them out.”

If you go on extension, you can fund a SEP IRA all the way up until the tax filing deadline. That means you can wait until you actually know how much you made before deciding how much to contribute.

Had a great year? You can shelter more income.
Had a weird year? You’re not locked into anything.

That flexibility alone makes it elite.

Second: it’s easy to set up.
No annual filings. No complicated plan documents. No special payroll gymnastics. You open it. You fund it. You invest your money. You move on with your life.

Third: it works for most people.
If you have freelance or business income in the rough range of $20,000 to $150,000 net, the SEP IRA is usually the right answer. Above that, other options like a solo 401(k) can make sense. Below that, it still works, but cash flow might be the bigger constraint.

But in that middle band where most freelancers and business owners live? The SEP IRA is a workhorse.

How the contribution actually works

This is where people often get confused, because the rules seem more complicated than they actually are.

The headline number you’ll see is: You can contribute up to 25 percent of compensation, capped at an annual maximum.

For 2025, the absolute dollar cap is $69,000. Most people never get close to that. The real limiter is your income.

If you’re self-employed, “compensation” is not your gross revenue. It’s your net business income, after expenses, and after accounting for the deductible portion of self-employment tax. Yes, this is annoying to figure out. No, you don’t have to calculate it by hand. Your accountant or Quickbooks can do it for you.

In practice, the SEP IRA contribution for most people usually ends up being about 20 percent of net profit, not 25.

That’s because SEP limits are applied after subtracting the deductible portion of self-employment tax, so the effective contribution rate is lower for self-employed income.

This is the basic order of operations to figure out how much you’ll want to put into your SEP IRA:

1. You earn money.

2. You subtract business expenses.

3. You calculate taxes and subtract that, as well. What you’re left with is your net profit.

4. Then you decide how much of that to put into the SEP (about 20% of net profit).

5. You get a deduction for your contribution and pay less on your tax bill.

The SEP IRA is a response to income you’ve already earned, not a guess at future income you might earn. And if you really want to do it right, starting NOW, you should save 20% of every single dollar you make in a high-yield savings account called something like SEP IRA BANANA STAND throughout the year. That way, you can just move the money in that account over to your actual SEP IRA account at the end of the year.

Case study: $125,000 income

Let’s say you’re a freelancer. A writer and content creator. You make money from brand partnerships, writing projects, and maybe some royalties.

Your net income for the year is $125,000 after business expenses. The deadline for filing your taxes if you got an extension is October 15. It’s now October 13th and your accountant hates you because you got them your documents just last week.

You got an extension back in April, because you are a reasonable person who understands that April 15th is a fake deadline. (Reminder, even though it’s fake, it’s still the deadline to PAY any tax you owe, which is why you’ve been paying your quarterly estimates throughout the year).

Your accountant runs the numbers and tells you that your maximum SEP IRA contribution is roughly $25,000. Please note that I’m using estimates here to illustrate a point. The actual numbers will be slightly different, and I didn’t take state taxes into consideration.

You don’t have to contribute that much! Maybe you have $5,000 saved. That’s still great! This is not an obligation. It’s a ceiling.

But let’s say you do have some money to contribute. You can open a brand new SEP IRA and move $25,000 into the account before the extended deadline. Important: THE MONEY MUST LAND IN THE ACCOUNT BEFORE YOUR TAX DEADLINE. YOUR TAX DEADLINE IS APRIL 15TH, IF YOU FILE FOR AN EXTENSION, YOUR DEADLINE IS OCTOBER 15TH.

If you do all this, here’s what this means:

• Your taxable income drops by $25,000 so instead of the tax rates applying to someone who earned $125,000, you’re only taxed as a person who earned $100,000.

• Your federal and state tax bills drop accordingly, as well.

• That $25,000in your SEP IRA is now invested for retirement. And as it grows, it’s protected from taxation, just like a 401(k) .

This is not a hack, it’s not aggressive. This is simply using the tools available to you.

If you’re in, say, a combined 30 percent marginal tax bracket, that contribution might save you around $7,500 in taxes. And unlike some deductions, you don’t have to justify this to anyone. Retirement contributions are boring. The IRS likes boring.

Why it beats most other options

People love to jump straight to the solo 401(k). And sometimes, that’s correct. Especially at higher income levels.

But the solo 401(k) comes with more rules, more paperwork, and more opportunities to mess it up. There are employee contributions, employer contributions, filing requirements once the balance grows, and more ways to accidentally do it wrong.

For someone earning under $150,000 net, the SEP often gets you most of the benefit with a fraction of the complexity. That matters. Complexity is where people freeze. Or procrastinate. Or give up entirely. The best retirement account is the one you’ll actually contribute to.

The emotional case for the SEP IRA

Freelancers and business owners need flexibility because their income is emotional.

It is lumpy. It is unpredictable. It arrives in waves and disappears just as fast. Asking someone in that position to commit to a fixed monthly retirement contribution is often unrealistic.

The SEP IRA meets you where you are.

Good year? Do more.
Bad year? Do less.
Weird year? Wait and decide later.

A note on timing and planning

This is also where tax planning starts to matter. Real tax planning is not a last-minute scramble. It’s a slow, deliberate, multi-year process.

The SEP IRA is a tool that works best when it’s part of a system. When someone is looking at your income, your taxes, your investments, and your future plans together. When decisions compound over time.

This is also why I get so cranky about “tax hacks.” Writing off a chair will never matter as much as making one good retirement contribution decision every year for ten years.

Boring beats clever. Every time.

Who should not use a SEP IRA

If you have W-2 employees, things get more complicated. SEP rules require you to contribute the same percentage for eligible employees. That can get expensive fast.

If your income is very high and very stable, other plans may allow higher contributions. And if you have access to a great employer retirement plan already, this may be redundant.

But for solo operators? Freelancers? Small business owners without employees? It’s hard to beat.

Parting shot: The SEP IRA is flexible. It is forgiving. It works with the way real people earn money. And it gives you something rare in personal finance: time.