Your last job had a 401(k) because a benefits person set it up. Self-employment deleted that person. It did not delete retirement. A SEP-IRA is the plan your boss was supposed to fund, rebuilt for a person who is now the boss, the payroll clerk, and the one who will actually be old.
The IRS treats a simplified employee pension as a written plan that lets you contribute to a SEP-IRA for yourself — and for employees, if you have them — without running a full corporate 401(k). For 2026, IRS Notice 2025-67 set the defined-contribution limit at $72,000. A SEP contribution is an employer contribution, generally up to 25% of compensation, not above that dollar cap. There is no extra employee deferral inside a SEP the way there is inside a 401(k).
A SEP-IRA is simple on purpose
You can adopt a SEP with Form 5305-SEP or a prototype from a bank or brokerage, then open the SEP-IRA at a financial institution. Contributions must be cash, not a used car. The IRS page on retirement plans for self-employed people is the checklist. You do not need a board resolution and a benefits consultant to start.
Timing is the feature people miss. A SEP can generally be set up and funded by the due date of the business return, including extensions. That is more forgiving than a one-participant 401(k), which needs to exist by year-end if you want that year’s employee deferrals. If you are staring at a profitable December with no plan, the SEP is the door that is still open.
If you have eligible employees, the generosity has a cost. Contribute for yourself at a given percentage and you contribute for them at that percentage, subject to the plan’s eligibility rules. A SEP is a poor place to hide a personal windfall if you just hired two people. Read Publication 560 before you treat it like a private piggy bank.
When a solo 401(k) earns the extra paperwork
A one-participant 401(k) — solo 401(k), individual 401(k) — is for a business with no employees other than you and, if they work in the business, your spouse. You can make an employee elective deferral and an employer profit-sharing contribution. For 2026, the elective-deferral limit is $24,500, with catch-up contributions for ages 50 and older under the Code’s catch-up rules. Combined employer and employee additions still sit under the $72,000 defined-contribution cap before catch-up.
That extra deferral is why a solo 401(k) can out-save a SEP at the same profit, especially in a moderate-income year when 25% of net earnings is a small number but you still have cash to park. The trade is administration: a plan document, a December 31 existence test for deferrals, and Form 5500-EZ once assets cross the filing threshold. A SEP is still the calmer tool if you want one account and one contribution type.
Fund the plan like it is payroll
- Open the SEP-IRA at a low-cost brokerage. Pick a target-date or broad index fund. This is not the place to prove you can day-trade.
- After you know a quarter’s profit, transfer a percentage the same week you transfer tax money. Retirement and the IRS should leave the operating account together.
- If you might hire, model the employee cost before you lock a large SEP percentage.
- If you are consistently able to save more than the SEP percentage allows, talk to a tax pro about a solo 401(k) for next year, not in a panic on December 30.
- Do not raid the account for “inventory.” Early distributions have tax and penalty rules. That is the point of a retirement plan.
A traditional IRA is still useful, but its 2026 contribution limit is a different, smaller animal. The SEP exists because a one-person business can have a real employer contribution without pretending to be a Fortune 500 plan.
Old you is a vendor. Pay the invoice.
The hustle narrative says you will save “once it is stable.” Stable is a moving target. A SEP-IRA turns a good year into a future paycheck using rules the IRS already wrote down. Use them. Your former employer was not being sentimental. They were using the tax code. You can too.
