HOW-TO GUIDE
How to Set Up a SEP-IRA — Self-Employed Retirement Plan Guide 2026
Step-by-step guide to establishing a SEP-IRA — contribution limits, deadlines, deduction rules, and comparison with Solo 401(k) and SIMPLE IRA.
SEP-IRA Overview: The Simplest Self-Employed Retirement Plan
A Simplified Employee Pension IRA (SEP-IRA) is the simplest and most flexible retirement plan for self-employed individuals and small business owners. There are no annual filing requirements (no Form 5500), no minimum contribution requirements, and contributions can be made up to the tax return due date (including extensions). The SEP-IRA is ideal for self-employed individuals who want maximum simplicity and flexibility.
The SEP-IRA contribution limit for 2026 is the lesser of: (1) 25% of compensation (for employees) or approximately 20% of net SE income (for self-employed individuals after the SE tax deduction); or (2) $70,000. For a self-employed individual with $200,000 of net SE income, the maximum SEP-IRA contribution is approximately $37,200 (18.6% of $200,000 after the SE tax deduction).
| Plan Type | 2026 Contribution Limit | Catch-Up (50+) | Filing Requirement | Deadline | Complexity |
|---|---|---|---|---|---|
| SEP-IRA | $70,000 (25%/20% of comp) | None | None | Tax return + extensions | Very Low |
| Solo 401(k) | $70,000 ($77,500 if 50+) | $7,500 | Form 5500-EZ (if > $250K) | Dec 31 (employee); tax return (employer) | Low |
| SIMPLE IRA | $16,500 ($20,000 if 50+) | $3,500 | None | Oct 1 to establish | Low |
| Defined Benefit Plan | Up to ~$280,000 | None | Form 5500 | Tax return + extensions | High |
Step-by-Step SEP-IRA Setup
Step 1 — Choose a Financial Institution: Open a SEP-IRA at any financial institution that offers IRAs: Fidelity, Vanguard, Schwab, TD Ameritrade, or any bank or brokerage. There are no setup fees at most major brokerages. The financial institution will provide a SEP-IRA adoption agreement (Form 5305-SEP or a prototype plan document).
Step 2 — Execute the SEP-IRA Adoption Agreement: Complete Form 5305-SEP (Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement) or the financial institution's prototype plan document. This is a simple one-page form that establishes the plan. Keep a copy for your records.
Step 3 — Calculate Your Contribution: For self-employed individuals, the SEP-IRA contribution is calculated on Schedule SE and Schedule 1. The formula: Net SE income × 0.9235 (SE tax adjustment) × 0.25 / 1.25 = maximum contribution. Or use the IRS worksheet in Publication 560. The maximum contribution for 2026 is $70,000.
Step 4 — Make the Contribution: Contribute to the SEP-IRA by the tax return due date (including extensions). For a sole proprietor with a calendar year, the deadline is April 15 (or October 15 with extension). The contribution is deductible on Schedule 1 of Form 1040.
Step 5 — Consider Employees: If you have employees, you must contribute the same percentage of compensation to their SEP-IRAs as you contribute to your own. This is the main disadvantage of the SEP-IRA for businesses with employees — it can be expensive. If you have employees, consider a SIMPLE IRA or 401(k) instead.
Case Study: $37,200 Deduction Saves $13,764 in Taxes
Sarah, a freelance graphic designer, earned $200,000 of net SE income in 2025. She had no retirement plan. Her practitioner set up a SEP-IRA at Fidelity (took 20 minutes online) and calculated the maximum contribution: $37,200. Sarah contributed $37,200 to the SEP-IRA before the October 15 extension deadline. Tax savings: $37,200 × 37% (federal marginal rate) = $13,764 in federal income tax savings + $3,720 in state income tax savings (at 10%). Total savings: $17,484. The SEP-IRA setup was free at Fidelity.
Client Conversation Script
Client: 'I keep hearing about SEP-IRAs. Should I have one?' Practitioner: 'If you are self-employed and you are not already contributing to a retirement plan, a SEP-IRA is the easiest way to reduce your taxes significantly. With your $150,000 of net SE income, you could contribute up to $27,000 to a SEP-IRA and deduct it from your income. That saves you about $10,000 in federal taxes alone. The setup is free at Fidelity or Vanguard and takes 20 minutes. The only catch: if you have employees, you have to contribute the same percentage to their accounts too. Do you have any employees?'
Connect Your Clients with Uncle Kam Tax Professionals
Uncle Kam connects clients with licensed CPAs, EAs, and tax attorneys who specialize in this area.
Apply to Join the Marketplace →Frequently Asked Questions
The SEP-IRA contribution limit for 2026 is the lesser of 25% of compensation (approximately 20% of net SE income for self-employed individuals) or $70,000. There is no catch-up contribution for SEP-IRAs (unlike Solo 401(k)s, which allow $7,500 catch-up for those 50+).
The SEP-IRA contribution deadline is the tax return due date including extensions. For a sole proprietor with a calendar year, the deadline is April 15 (or October 15 with extension). This is later than the Solo 401(k) employee deferral deadline (December 31).
Yes — you can have both a SEP-IRA and a Traditional IRA. However, if you (or your spouse) are covered by a workplace retirement plan (including a SEP-IRA), the Traditional IRA deduction may be limited based on your income. For 2026, the phase-out for Traditional IRA deductibility begins at $79,000 (single) and $126,000 (MFJ) for active participants.
The SEP-IRA is simpler (no filing requirements, no catch-up contributions) but has lower effective contribution limits for self-employed individuals (approximately 20% of net SE income vs. up to $70,000 for Solo 401(k)). The Solo 401(k) allows higher contributions because it includes both employee deferrals ($23,500) and employer contributions (25% of W-2 wages). For most self-employed individuals with income under $200,000, the Solo 401(k) allows larger contributions.
Yes — you can set up a SEP-IRA and make contributions for the prior year up to the tax return due date including extensions. This is a major advantage over the Solo 401(k), which must be established by December 31 of the tax year.
No — SEP-IRAs do not require annual Form 5500 filings, regardless of the plan balance. This is one of the main advantages of the SEP-IRA over the Solo 401(k) (which requires Form 5500-EZ when the plan balance exceeds $250,000).
If you hire employees, you must contribute the same percentage of compensation to their SEP-IRAs as you contribute to your own. For example, if you contribute 20% of your own compensation, you must contribute 20% of each eligible employee's compensation. This can be expensive — consider switching to a SIMPLE IRA or 401(k) if you have employees.
The information on this page is intended for licensed tax professionals (CPAs, EAs, and tax attorneys) and is provided for educational and research purposes only. Tax law is complex and fact-specific — all strategies discussed are subject to limitations, phase-outs, and conditions that may not apply to every client situation. Practitioners should independently verify all information against current IRS guidance, Treasury Regulations, and applicable state law before advising clients. This content does not constitute legal or tax advice.
Tax Clients Are Searching for Specialists on Uncle Kam. Join the Marketplace.
Uncle Kam connects clients with licensed tax professionals who specialize in complex tax situations. Free to join.