If you’re self-employed or run a small business, you’ve probably wrestled with how to save more for retirement while keeping things simple. SEP IRAs (Simplified Employee Pension Individual Retirement Accounts (Arrangements)) offer a smart, powerful, and low-maintenance solution for saving for retirement. 

Especially for high income professionals. In this insight, we’ll unpack five clear reasons why a SEP IRA might be the perfect fit for your retirement savings and business tax savings. 

As a Certified Financial Planner™ working with high earners and business owners, this strategy works year after year for those who want to save more, pay less in taxes, and simplify retirement planning.

5 Reasons a SEP IRA Is Right for You

Before we hop into the 5 reasons a SEP IRA is Right for you, let talk about:

• SEP IRA what it is,
• When is a SEP IRA appropriate,
• Characteristics of a SEP IRA
• Disadvantages of a SEP IRA
• And some of the special considerations that apply to SEP IRAs

SEP IRA what it is

Simplified employee pension plan also referred to as SEP for short. At the base this is a retirement account for an individual. 

However, this individual retirement account is established in connection with a business. SEP IRAs provide convenience and flexibility to the business owner.

Responsibility of the business owner   

The business owner will establish an employer agreement when the SEP IRA is created. And the agreement will determine how contributions are made to individual accounts on a non discretionary basis. 

The business owner can establish the SEP account for the employees or the employees can establish their accounts themselves. At account establishment the employer adoption agreement must be on file for each account owner. 

And no worries this is the same file for each account. The business owner completes the initial form and all eligible employees use the same form.

Responsibility of the employee

These individual accounts are maintained by the employee, and the employee has full discretion on the investment section in the SEP IRA account. All contributions to the SEP IRA account are made by the business owner.

Employee contributions are not allowed. And the employer contributions are not mandatory.  

When is a SEP IRA appropriate

SEP IRAs are most appropriate for business owners that do not have many employees. And are seeking an easier and less expensive way to manage and establish a retirement plan for employees.

Unique to SEPs a business owner can establish a retirement plan for the previous calendar year. As long as they are within their tax filing deadline, including extensions. 

Characteristics of a SEP IRA

• Must have an employer adoption agreement
• The money in SEP accounts can be moved, transferred, withdrawn by the employee at any time.
  • Early withdrawals are subject to penalties 
• The contributions to the SEP IRA are always fully vested and can not be forfeited. 
• The business owner can choose to make a contribution to the employees SEP IRA or not for any given year.
  • However, to contribute or not to contribute is for all employees and the same formula/percentage is used across the eligible employee base.
• SEP plans can be integrated with social security. Meaning that higher paid employees can receive greater contribution amounts, and not have an issue with favoring higher paid employees over lower paid employees.
  • The way that the excess method works is as follows:
    • All employees get a base percentage plus the maximum permitted disparity between the all employee percentage and the excess percentage. Therefore, base contribution amounts between 1% and 5% have a matching 1% and 5% maximum excess contribution for the higher paid employees over the social security wage base. 
    • Now for contribution amounts over 5% the maximum additional excess is the percentage plus 5.7%. For example, if you have a base percentage of 10% the maximum addition is 5.7%; therefore, the total contribution is 15.7%.

BUT WAIT…that’s not all, and the calculation is not that simple. So let’s look at the following example.

Example of permitted disparity in a SEP IRA account for high earners

Before we get into the example some information you will need to know. In 2025 the maximum includable income for a SEP IRA is $350,000. And the social security wage base is $176,100 in 2025.

Let’s discuss Mary’s situation. Mary is a business owner and she makes $500,000 a year. And she has decided to make a 10% contribution to all eligible employee SEP IRA accounts. 

Her base contribution amount is 10% of the social security wage base. $176,100 * .10 = $17,610 represents her base contribution to the simplified employee pension IRA. 

The permitted excess contribution amount would be 5.7% in addition to the $17,610. Now, we would determine the amount above $17,610 until we reach the maximum includable income for 2025 which is $350,000.

Now, let’s multiply $350,000 * .10 = $35,000. Now take $35,000 – the base contribution ($17,610) = $17,390.  Lastly, multiply $17,390 * 1.57 = $27,302.3 excess contribution amount.

Now the total contribution Mary can make to her SEP IRA in 2025 is $17,610 + $27,302.3 = $44,912.30.

And this is lower than the maximum contribution amount for a defined contribution plan in 2025 ($70,000). This is a huge win for Mary because she could have defaulted to 10% base contribution and only contributed $35,000 to her simplified employee pension individual retirement account. 

However, she was able to contribute an additional $9,912.30 for 2025. Now imagine how fast this can compound over the next few years. 

5 Reasons a SEP IRA Is Right for You

Now that we have covered the who, what, when, where, and how of SEP IRAs, let’s get into the 5 reasons a SEP IRA is right for you. Assuming of course that the above mentioned information aligns with your situation.

1. Higher Contribution Limits Help You Save More

SEP IRAs allow you to contribute up to 25% of your compensation, up to $70,000 for 2025. That’s a huge step up from the $7,000 cap on traditional and Roth IRAs if you’re under 50 and $8,000 for 50 and better.

Oftentimes people in their 50s say, “I need to catch up on retirement savings fast.” A SEP IRA becomes the tool that helps them do just that. 

If you’re self employed and earning well, it’s maybe a no-brainer. You can potentially set aside tens of thousands each year in pre-tax dollars, helping both your retirement and your current tax situation.

Compare this with Traditional vs. Roth IRAs, and you’ll quickly see the SEP’s unique value.

2. Contributions Are Tax-Deductible for the Business Owner

Contributing to a SEP IRA helps reduce your taxable income. If you’re running a business as a sole proprietor, S Corp, or LLC, these contributions count as a business expense.

Think of it as a double win: you’re saving for your future and cutting your current tax bill.

Consider this scenario of someone that we will refer to as Mike. Mike is 48 years old and has earned income from consulting of $220,000. Last year, he contributed $55,000 to his SEP IRA. 

That move alone helped reduce his tax bill significantly and brought his taxable income below the threshold for other tax credits.

You can even save more on taxes using this and other layered strategies.

3. SEP IRAs Are Easy to Set Up and Maintain

There’s no annual IRS filing requirement for SEP IRAs. You don’t have to run complex compliance tests. And most custodians (Fidelity, Schwab, Vanguard, etc.) offer free or low-cost SEP setup.

When comparing to 401K plans a SEP IRA benefits a business owner with a few employees in the following ways:

• Less paperwork and filing requirements 
• Reduced maintenance task vs. 401Ks
• And potential SEP IRA can have a lower admin cost

It’s one of the few retirement strategies where a small action today leads to a massive impact later. True to our belief at A Small Investment, LLC.

4. Perfect for Solopreneurs and High-Income Professionals

If you don’t have employees, the SEP IRA gives you total control. You make contributions. You choose investments. You control the pace.

This is especially attractive for:

• Consultants
• Independent contractors
• Real estate agents
• Private practice doctors
• High income earners and freelancers

You can even compare it with a Solo 401(k), but if you prefer fewer rules and easier maintenance, the SEP often wins. Not sure which fits best? Let’s discuss your situation, and compare. 

5. Flexible Contributions Match Your Cash Flow

Unlike traditional retirement plans that require set contributions, SEP IRAs let you decide how much to contribute each year simplified employee pension contribution limits. You can pause contributions during slower income years and ramp up when business is booming.

This flexibility works beautifully for high earners with variable income. This is a common theme among clients in consulting, creative, or commission based roles.

Another hypothetical scenario is a wedding photographer named Sarah, her income varies during peak and non peak wedding seasons. With her SEP, she contributed nothing in 2023, then contributed $35,000 in 2024 as the post pandemic factors normalized.  

SEP IRA’s offer no penalties for not making a contribution in a given year. No judgment. Just options.

However, keep in mind if you have employees that meet your plan document eligibility requirements; and, if you (the business owner) as an employee receive a contribution the employees must receive a contribution as well. More on this in the next section.

Pair this with your year-end planning checklist for smart timing.

When a SEP IRA Might Not Be Right for You

If you have employees, you must contribute the same percentage of salary for each eligible worker. That can get expensive fast if you want to contribute a high percentage to your own account.

Also, SEP IRAs don’t offer Roth options, loans, or catch-up contributions. And if you want more customization, a Solo 401(k) or Defined Benefit Plan might be better suited for you. 

We cover these nuances during our strategy sessions.

Final Thoughts from André Small a CFP® Professional

If you’re between 40 and 70, earning well, and want a retirement plan that gives you tax breaks, flexibility, and simplicity, a SEP IRA could be your best move this year.

It’s often the right answer when you want to take small, powerful actions toward long term wealth. And that’s exactly what we help you do at A Small Investment.

If you’re wondering where the SEP IRA fits into your bigger picture, let’s talk. You can start with our free Downloadable Worksheets or reach out for a personal consultation.

Related Articles and Resources:

• Must Do: Before Your Next Million Dollars
• 10 Facts About Deductible IRA Contributions
• Celebrating Financial Wins (Part 1)
• Common Mistakes to Avoid When Saving
• Why Fee-Only? Why ASI?

Need help deciding your next move? Let’s Talk.