Most people know about IRAs. You put money in, it grows tax-deferred, great. But the standard IRA caps you at $7,000 a year. If you’re self-employed and actually making decent money, that ceiling gets frustrating fast.
That’s where the SEP-IRA comes in.
SEP stands for Simplified Employee Pension. It’s a retirement account the IRS specifically designed for self-employed people and small business owners — freelancers, contractors, side-hustle earners, sole proprietors, all of it. A business of any size can open one. Even if your “business” is just you.
Here’s what makes it different: instead of a flat $7,000 annual cap, you can contribute up to 25% of your net self-employment earnings. The IRS puts a ceiling on the total dollar amount too — $61,000 for 2022, with the limit adjusting annually — but for most people early in their self-employment journey, the 25% rule is the one that actually applies.
To put that in real terms: if you net $40,000 from freelance work in a year, you could sock away up to roughly $10,000 into a SEP-IRA (the exact amount depends on IRS calculations for self-employed individuals, including a deduction for self-employment tax). On a $7,000-limit regular IRA, you’d be capped well before that.
Opening one isn’t complicated. You can set up a SEP-IRA through a bank, mutual fund, or other financial institution — most major brokerages offer them. There’s also an IRS form (Form 5305-SEP) that handles the official agreement side of things.
One thing to know if you ever hire people: if you contribute to your own SEP-IRA, you generally have to contribute the same percentage of compensation to SEP-IRAs for any eligible employees too. That’s a rule backed by both the IRS and Department of Labor, and it’s worth keeping in mind as your business grows.
But if it’s just you right now? This account is one of the most powerful retirement tools available to someone your age who’s earning on their own terms.