SEP-IRA

Detailed Explanation

A SEP-IRA (Simplified Employee Pension Individual Retirement Account) is an employer-funded retirement plan that contributes employer-only money to traditional IRA accounts owned by each eligible employee. 2026 contribution limits: lesser of 25% of compensation (W-2) or roughly 20% of net self-employment earnings, capped at $70,000 per participant. Unlike Solo 401(k), there is NO employee deferral component, so the participant cannot make Roth contributions through a SEP. Critical equality rule: if the business has employees, contributions must be made for ALL eligible employees as the same percentage of compensation. This effectively eliminates SEP-IRAs as a tax-shelter strategy once a small business hires its first non-spouse employee, since the owner cannot contribute proportionally more for themselves. SEP-IRAs are extremely easy to administer: adopted on Form 5305-SEP (or a custom plan), no Form 5500 annual filing for any plan size, deadline to establish AND fund is the tax-filing deadline INCLUDING extensions, and contribution amounts can be changed each year. The pro-rata rule for Backdoor Roth (IRC §408(d)(2)) treats SEP-IRA balances as part of the same Traditional IRA bucket, complicating Backdoor Roth strategy. For owner-only businesses, the Solo 401(k) almost always allows higher contributions at any given income level (because of the employee deferral piece) and offers Roth options the SEP cannot. For very small contributions or one-person plans where simplicity matters more than maximum savings, SEP-IRA still has a place.