Direct Answer
A SEP IRA (Simplified Employee Pension Individual Retirement Account) allows employers and self-employed individuals to make tax-deductible contributions to employee IRA accounts. The 2026 limit is the lesser of 25% of compensation or $72,000 (compensation capped at $360,000). Only the employer contributes; no employee elective deferrals are permitted.
SEP IRA Profile: Contribution Limits, Rules and Eligibility
What is a SEP IRA?
A SEP (Simplified Employee Pension) IRA is an employer-sponsored plan under IRC Section 408(k). The employer establishes a SEP plan agreement (typically IRS Form 5305-SEP) and makes contributions directly to Traditional IRA accounts in each eligible employee's name. There are no participant loans, no Roth options in a traditional SEP (though SECURE 2.0 now allows Roth SEP contributions if the plan document permits), and contributions vest immediately 100%.
SEP IRAs are popular among sole proprietors, partnerships, S-corporations and small businesses because of their low administrative complexity, high contribution ceilings and flexible annual contribution amounts (the employer can contribute different amounts each year, including zero).
2026 Contribution Limits
| Parameter | 2026 Amount |
|---|---|
| Maximum contribution | Lesser of 25% of compensation or $72,000 |
| Compensation cap (§401(a)(17)) | $360,000 |
| Maximum effective contribution | $72,000 (25% × $288,000+ comp) |
Source: IRS Rev. Proc. 2024-40. For self-employed individuals (Schedule C filers), compensation = net self-employment income minus the deductible portion of self-employment taxes (half of SE tax). The effective rate is approximately 20% of net SE income before the SEP deduction itself (due to circular calculation). IRS Publication 560 includes a worksheet to calculate the exact deductible amount.
Employee Eligibility Requirements
Employers must generally include all employees who meet all of the following:
- At least 21 years of age
- Worked for the employer in at least 3 of the last 5 years
- Earned at least $750 in compensation from the employer (2026; indexed)
Employers may use less restrictive requirements but cannot use more restrictive ones. The same contribution percentage must be applied to all eligible employees. If one employee receives 15% of compensation as a SEP contribution, all eligible employees must receive the same percentage.
RMDs and Distributions
SEP IRA funds are held in Traditional IRA accounts and follow all Traditional IRA rules for distributions and RMDs:
- Withdrawals taxed as ordinary income
- 10% early distribution penalty before age 59½ (same exceptions as Traditional IRA)
- RMDs begin at age 73 (born 1951-1959) or 75 (born 1960 or later)
- RMDs calculated separately for each Traditional/SEP IRA you own, but may be aggregated and taken from any one or combination
Frequently Asked Questions
- What is the SEP IRA contribution limit for 2026?
- The 2026 SEP IRA contribution limit is the lesser of (1) 25% of the employee's compensation or (2) $72,000. For self-employed individuals, 'compensation' means net self-employment income reduced by one-half of self-employment taxes paid, making the effective contribution rate approximately 20% of net self-employment income before the deduction. The compensation used in this calculation is capped at $360,000. Source: IRS Rev. Proc. 2024-40.
- Can employees contribute to a SEP IRA?
- No. SEP IRA contributions are made exclusively by the employer. Employees cannot make their own elective deferrals to a SEP IRA. Self-employed individuals act as both employer and employee and contribute to their own SEP IRA in the employer capacity.
- How does a SEP IRA compare to a Solo 401(k) for self-employed individuals?
- Both can reach the $72,000 limit in 2026, but a Solo 401(k) reaches higher contribution amounts at lower income levels due to the employee deferral layer ($24,500 plus profit-sharing). A SEP IRA allows only employer-side profit-sharing (25%/~20% of net SE income). SEP IRAs are simpler to establish with no annual Form 5500 filing requirement.