What Is a SEP IRA?

SEP stands for Simplified Employee Pension, and the “simplified” part is the whole point. It is a retirement account that a business sets up and funds on behalf of its owner and any eligible employees. In practice the typical SEP IRA holder is a freelancer, consultant, contractor, or small-business owner who wants to shelter a chunk of self-employment income from tax while it grows. Sole proprietors, partnerships, LLCs, and corporations can all use one, and there is no minimum business size.

Mechanically it works like a traditional IRA once the money is inside: you hold investments such as index funds, ETFs, or individual stocks, and the balance grows tax-deferred. What sets a SEP apart is who contributes and how much. The business makes the contributions, not the individual as an employee deferral, and the ceiling is far higher than a regular IRA. That combination of a high limit and minimal upkeep is why so many self-employed people reach for it first.

The headline feature is the size of the contribution. For 2026, a SEP IRA contribution is limited to the lesser of 25% of compensation or $72,000, which is up from $70,000 in 2025. Only the first $360,000 of compensation counts toward the 25% calculation. That is many times the regular IRA limit, which is why high earners use a SEP to catch up on retirement saving in a single account.

There is one wrinkle for the self-employed. The 25% figure applies cleanly to a W-2 employee's compensation, but for a sole proprietor or partner the contribution is based on net earnings after the deduction for self-employment tax and the contribution itself, which works out to an effective rate of roughly 20% of net income rather than 25%. The dollar cap of $72,000 still applies. These numbers change every year, so confirm the current limit and the exact self-employed calculation with the IRS before you contribute. Walnut is not a tax advisor.

A SEP IRA is funded entirely by the employer. Employees cannot make their own salary-deferral contributions into it the way they can with a 401(k) or a SIMPLE IRA. For a one-person business that distinction does not matter, because you are both the employer and the only participant, so the money simply comes from the business and lands in your account.

If you do have employees, there is an important rule to understand: contributions must be proportional. You have to contribute the same percentage of compensation for every eligible employee that you contribute for yourself. Decide to put in 15% for your own account and each eligible employee receives 15% of their pay as well. That keeps the plan simple but means the cost scales with your payroll, which is the main reason owners with several employees sometimes look at other plans instead. Eligibility rules (such as age and years worked) are set by the IRS, so verify them before you set contribution rates.

Traditional SEP IRA contributions are pre-tax. The business deducts them as an expense, which lowers taxable income in the contribution year, and the money then grows tax-deferred. You owe no tax on dividends, interest, or gains inside the account while it compounds. Tax is paid later, when you take withdrawals in retirement, and those withdrawals are taxed as ordinary income. Like other IRAs, early withdrawals before age 59 and a half can trigger taxes and a penalty, and required minimum distributions eventually apply.

Under SECURE 2.0 the IRS introduced a Roth SEP option, where contributions go in after tax and qualified withdrawals come out tax-free, but not every provider offers it yet. If the Roth treatment matters to you, check whether your chosen custodian supports it, and verify the current rules with the IRS. This page is descriptive, not tax advice.

The administrative burden is a big part of the appeal. Opening a SEP IRA usually means completing a single IRS form (Form 5305-SEP, or the provider's equivalent) and opening the account with a brokerage or custodian. In most cases there is no annual IRS filing requirement for the plan, no complex testing, and no ongoing compliance paperwork of the kind a 401(k) carries.

Flexibility helps too. You are not locked into contributing every year, and you can vary the amount from year to year within the limit, which suits self-employed income that rises and falls. You can also often fund a SEP for the prior tax year up until your business tax-filing deadline, including extensions, giving you time to size the contribution once you know your income. Confirm the current deadlines and setup requirements with the IRS or your custodian.

The three plans solve slightly different problems. A SEP IRA is the simplest and scales naturally as you add staff, but every eligible employee gets the same percentage you give yourself. A Solo 401(k) lets a one-person business (owner and spouse only) contribute as both employee and employer, so it can allow larger totals at lower income, add catch-up contributions for those 50 and older, and include a Roth bucket, at the cost of more paperwork. A SIMPLE IRA suits small teams whose employees want to defer their own pay, with lower limits and a mandatory employer match or contribution. Figures are for 2026 and change yearly; verify the current numbers with the IRS.

Opening a SEP IRA is the easy part. The harder, ongoing work is deciding what to actually hold inside it and keeping track of how those investments are doing, since the account is yours to manage. Many SEP holders fill it with low-cost index funds or ETFs and rarely look again, which is fine, but it helps to be able to see how concentrated you are, how each position is doing against a benchmark, and where your holdings overlap.

That is where Walnut fits, with an important caveat: Walnut is not a tax or financial advisor and does not give tax advice. What it does is connect your existing brokerage account through SnapTrade and let you ask, in plain language through Claude, ChatGPT, or a built-in assistant, how the investments inside your SEP IRA are doing, how diversified they are, and how each holding tracks the market. It is read-only by default until you choose to trade, and any contribution-limit or tax question should go to the IRS or a qualified tax professional.

A SEP IRA is a simple, high-limit, tax-deferred retirement account for the self-employed and small-business owners. For 2026 you can contribute up to 25% of compensation to a cap of $72,000, the business funds it, the money grows pre-tax until retirement, and the paperwork is minimal. The one catch is that if you have employees you must contribute the same percentage of pay for each eligible one. For a high earner with few or no staff who wants the largest contribution with the least hassle, it is hard to beat.

If you want employee salary deferrals, a Roth option, or even larger totals at modest income, compare it with a 401(k) (including the Solo 401(k)) and read up on how a traditional or Roth IRA fits alongside it. Limits, deadlines, and eligibility rules for 2026 change and depend on your circumstances, so verify everything with the IRS and a qualified tax professional before you open or fund an account.