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Maximize Retirement Savings and Tax Benefits with a SEP IRA
Being self-employed comes with plenty of perks: freedom, flexibility, and no boss looking over your shoulder. But tax season? That’s often when the shine fades. Between self-employment taxes and quarterly estimates, it can feel like too much of your hard-earned income is slipping away.
That’s where a SEP IRA (Simplified Employee Pension Individual Retirement Account) could become one of your best tools. Not only can it help you save for retirement, it can also deliver bigger tax deductions than a Traditional or Roth IRA, especially if your income is high.
Why SEP IRAs Stand Out for Tax Savings
A SEP IRA is designed for freelancers, contractors, and small business owners. Many of these small business owners operate as sole proprietors. They run their business on their own and report income and expenses on their personal tax return without forming a separate legal entity. This structure makes a SEP IRA especially powerful. It works like a super-charged Traditional IRA, but with much higher contribution limits. Since contributions are tax-deductible, every dollar you put in can lower your taxable income for the year.
While a Roth IRA doesn’t provide an upfront tax break (since contributions are made with after-tax dollars), a Traditional IRA does. In 2025, you can contribute up to $7,000 annually to a Traditional or Roth IRA, or $8,000 if you’re 50 or older (including the $1,000 catch-up contribution). In 2026, the limits increase to $7,500 annually, or $8,600 if you’re 50 or older (including the $1,100 catch-up contribution). A SEP IRA, on the other hand, lets you contribute up to 25% of your compensation, about 20% of your net self-employment income after adjustments, with a maximum of $70,000 in 2025. That’s about 10 times the Traditional IRA limit.
Key Tax Advantages of a SEP IRA
1. Deduct More, Pay Less
If you earn $100,000 from self-employment, the type of IRA you use affects how much you can deduct from your taxes:
- Traditional IRA: Contributions may be tax-deductible depending on income and whether you (or your spouse) are covered by a workplace retirement plan.
- Roth IRA: Contributions are made with after-tax dollars, so there is no upfront tax deduction.
- SEP IRA: Contributions are generally much higher than Traditional or Roth limits, based on a percentage of income according to IRS rules.
With a SEP IRA, you could lower your taxable income by thousands, reducing your tax bill while putting more into retirement savings.
2. Business Expense Treatment
Contributions to a SEP IRA aren’t just saving for the future. They can also lower your taxable income. For self-employed individuals, this means the money you put in reduces your net income, which can lower the amount you owe in income taxes. Specifically:
- Your business’s taxable income goes down.
- For employers with employees, contributions made on their behalf are deductible as a business expense and aren’t subject to Social Security, Medicare, or federal unemployment taxes.
- If you have employees, you can deduct contributions made for them as well (though the percentage must match your own).
3. Tax-Deferred Growth
Like a Traditional IRA, your SEP IRA investments grow tax-deferred. You won’t pay taxes on dividends, interest, or capital gains each year. Instead, you’ll pay taxes when you start taking withdrawals in retirement, ideally when you’re in a lower tax bracket.
4. Flexible Timing for Contributions
You don’t have to rush to contribute by December 31. You have until your tax filing deadline (including extensions) to make a SEP IRA contribution for the previous year. This gives you time to see your final income numbers and calculate the contribution amount that maximizes your deduction.
5. No Annual Contribution Requirement
If your income fluctuates, you can adjust your contributions or skip a year entirely. This flexibility is especially valuable if your earnings are seasonal or unpredictable.
