SEP IRAs are an attractive retirement savings plan for self-employed people. SEP IRA contribution limits are higher than most options, which a max contribution limit of up to $66,000 for 2023 and $61,000 for 2022.

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Let’s dig into the specifics of how much you can contribute to your SEP IRA, including whether or not you can make catch-up contributions, how to calculate contributions, and SEP IRA rules.

What is a SEP IRA?

SEP stands for Simplified Employee Pension, and it’s an individual retirement account (IRA) that self-employed people can establish to save for retirement. These are tax-advantaged savings plans that allow you to take a tax deduction for contributions. One of the main advantages is that SEP IRAs have higher annual contribution limits, making them a really attractive option if you’re self-employed.

Any kind of self-employed business owner with one or more employees can open a SEP IRA, but only the employer can make contributions.

SEP IRAs function as traditional IRAs, meaning contributions can lower your tax burden and you pay taxes when you take disbursements in retirement.

What Are the SEP IRA Contribution Limits for 2022 and 2023?

Self-employed business owners can contribute as much as 25% of their net income in a SEP IRA, but it cannot exceed the maximum contribution limit of $66,000 in 2023. The contribution limit for 2022 was $61,000. The compensation limit you can use to calculate contributions is $330,000 for 2023 and $305,000 for 2022.

Contributions are made as the employer only. This is true if you (the self-employed business owner) are the only one enrolled in your plan, or if you have employees enrolled as well. That’s because employees do not make contributions to SEP IRAs.

The other catch about SEP IRAs is that if you have employees enrolled in your plan, the business owner must make equal contributions to their employees’ SEP IRA. So if you contribute 10% of your wages to your SEP IRA, you’ll need to contribute 10% of each of your employees’ wages to theirs as well.

The contributions the employee-owner makes to their SEP IRA and their employees’ are tax-deductible up to the set contribution limits

Do SEP IRAs Allow for Catch-Up Contributions?

No, because SEP IRAs are funded by employer contributions only, they don’t allow for catch-up contributions. Catch-up contributions are an additional employee contribution that people aged 50 or older can make.

If you’re self-employed without employees and want something that allows for catch-up contributions, you might want to consider a Solo 401(k). Solo 401(k)s allow catch-up contributions of up to $6,500 for 2022 and $7,500 in 2023. They also have higher contribution limits: $61,000 for 2022 and $65,000 in 2023, which is split between employee and employer contributions as follows.

Read more at Solo 401(k) Contribution Limits.

Can an Employee Contribute to a SEP IRA?

SEP IRAs only allow for employer contributions, so employees cannot make contributions. Even the business owner, who’s an employee-owner, isn’t making contributions as an employee. They are technically making contributions on the employer side.

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There are some key rules you should be aware of with SEP IRAs:

  • Employers must contribute on their employee’s behalf, and the contribution must be a matching percentage to what you contribute to your own plan. For example, if you (the employer) contribute 15% of your wages to your plan, then you must contribute 15% of your employee’s wage to their plan.
  • Employers are not obligated to make contributions every year, so if it’s a tight year, you don’t have to contribute.
  • Employees are fully vested, meaning they own and control their own accounts.
  • The max SEP IRA contribution limit for 2022 is $61,000 and for 2023 it’s $66,000.
  • SEP IRAs require minimum distributions beginning at age 72, like traditional IRAs and 401(k)s.
  • Distributions taken before age 59 ½ are taxed as income and subject to a 10% penalty in most cases

The rule that employers must make matching contributions to their employee’s accounts is one of the reasons many self-employed people chose a Solo 401(k) over a SEP IRA. Solo 401(k)s are specifically for self-employed people without employees, and the only exception to that is if your spouse draws income from your business. In that case, you can effectively double the amount you contribute to your Solo 401(k).

Who Is Eligible for a SEP IRA?

If you’re thinking about setting up a SEP IRA and have employees, there are general eligibility requirements to consider. First, employees must be at least 21 years old. They must have worked for your business for three of the last five years. And they need to have earned at least $650 in the past year.

You can set up a SEP IRA for yourself (and your employees, if you’re interested) by finding a SEP IRA provider. Here’s a list of top SEP IRA Providers. Then you follow the steps outlined by the IRS:

  1. Create a formal written agreement. Most providers will have an agreement available for you to use, or you can use IRS Form 5305-SEP.
  2. GIve eligible employees information about the SEP IRA, including the formal agreement.
  3. Set up separate SEP IRAs for each eligible employee.

The Final Word on SEP IRA Contribution Limits

For 2023, you can contribute up to 25% of your income to your SEP IRA, but it cannot exceed the maximum contribution limit of $66,000.

SEP IRAs do not allow for catch-up contributions, and contributions are tax-deferred. Also, if you have eligible employees and contribute to your SEP IRA, you must make an equal contribution to theirs. This is because SEP IRAs do not allow for employee contributions– it’s the employer only who contributes to this kind of retirement savings plan.

It’s these rules about contributions that differentiate SEP IRAs from Solo 401(k), which are another really popular retirement savings plan for self-employed workers. If you’re on the fence about which one is right for you, check out this article on Solo 401(k) rules to learn more.


How much can I put in a SEP IRA?

Your annual contribution cannot exceed the lesser of 25% of your compensation or $58,000. So if you make $100,000 for the year, you can contribute $25,000 to your SEP IRA. It all depends on your net income for the year.
The amount you contribute changes year to year based on cost of living adjustments. It’s $58,000 for 2021, and it was $57,000 for 2020 and $56,000 for 2019. You can expect these adjustments to continue.

Can I contribute to a SEP IRA and a Roth IRA?

You can contribute to both a SEP IRA and either a traditional or Roth IRA in the same year as long as you meet income limit requirements. However, remember that SEP IRA contributions function as traditional contributions (or tax-deferred), so the amount you can deduct to your traditional IRA might be impacted by what you contribute to your SEP IRA.

What is the maximum SEP IRA contribution for 2021?

$58,000 is the max SEP IRA contribution for 2021.

How much can a self-employed person contribute to a SEP?

Contributions are limited to 25% of your net self-employment earnings, up to $58,000.

What type of contributions can be made into a SEP IRA?

Unlike a solo 401k, SEP IRAs only allow for traditional contributions. The money you contribute to your SEP IRA is tax-deductible, and you pay taxes on the disbursements you take in retirement.
Roth contributions, which you can choose with a solo 401k, are made with after-tax money. You’ve already paid taxes on that money, so in retirement, you don’t have to pay taxes on your disbursements. A retirement savings plan that allows for Roth contributions is generally better for people who think they’ll be earning more in retirement.

How do I calculate my SEP IRA contribution?

You use your net adjusted self-employment income as compensation when you calculate your SEP contribution limit of 25% of compensation. Here’s the formula to calculate your net adjusted self-employment income:
Determine your gross income
Subtract your business expenses, which include SEP IRA contributions
Subtract half of your self-employment tax
Based on all of that, if you are 34 years old and made $100,000 in 2021, you could contribute up to $18,587 to your SEP IRA.
Here’s what that looks like compared to other self-employed retirement plans using the same income:
Up to $38,087 in a solo 401k
Up to $16,207 in a SIMPLE IRA