SEP-IRA
A simplified employee pension IRA allowing self-employed individuals and small business owners to contribute up to 25 percent of net earnings to a traditional IRA structure.
Detailed Explanation
SEP-IRA contributions for 2025 are limited to the lesser of 25 percent of compensation or $70,000. Unlike a Solo 401(k), the SEP-IRA has no employee deferral component, so employees in the same business must receive proportional contributions (often disqualifying SEP-IRAs for businesses with employees). SEP-IRAs are easy to administer (Form 5305-SEP, no annual filing once funded under $250K) but lack Roth options, mega-backdoor Roth, and loan provisions. For most self-employed individuals, the Solo 401(k) provides higher contributions; the SEP-IRA fits when administrative simplicity matters more than maximum contribution.
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Learn about Tax Planning & StrategyRelated Terms
Solo 401(k)
A retirement plan for self-employed individuals and small business owners with no full-time employees, allowing both employee deferral and employer profit-sharing contributions.
Self-Employment Tax
The Social Security and Medicare tax (15.3% combined) paid by self-employed taxpayers on their net earnings from self-employment.
Backdoor Roth IRA
A two-step strategy of contributing to a non-deductible traditional IRA and converting it to Roth, used by high-income earners who exceed direct Roth IRA contribution limits.
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