SEP IRA Contribution Limits for 2025 and 2026
Everything you need to know about SEP IRA contribution limits, the 25% rule, compensation caps, and how to maximize your self-employed retirement savings.
📊 SEP IRA Contribution Limits at a Glance
Self-employed? Use 20% of net self-employment income (after deducting half of SE tax).
The SEP IRA contribution limits for 2025 and 2026 have increased, giving self-employed individuals and small business owners more room to save for retirement. For 2025, the maximum SEP IRA contribution is $70,000 or 25% of compensation, whichever is less. For 2026, the SEP IRA limit increases to $72,000.
Understanding these contribution limits—along with the compensation caps, eligibility rules, and deadlines—is essential for maximizing your tax-advantaged retirement savings. Below, we break down everything you need to know about SEP IRA contribution limits, including how they compare to alternatives like Maximum Funded IUL that offer unlimited contributions and tax-free income via policy loans.
SEP IRA Contribution Limits by Year
The IRS adjusts SEP IRA contribution limits annually for inflation. Here's a comparison of recent years:
| Tax Year | Maximum Contribution | Compensation Cap | Percentage Rule |
|---|---|---|---|
| 2024 | $69,000 | $345,000 | 25% |
| 2025 | $70,000 | $350,000 | 25% |
| 2026 | $72,000 | $360,000 | 25% |
💡 Key Takeaway
The 2026 limit of $72,000 represents a $3,000 increase from 2024. To reach the maximum contribution, you need compensation of at least $288,000 (since $288,000 × 25% = $72,000).
How SEP IRA Contribution Limits Work
The 25% of Compensation Rule
SEP IRA contributions are limited to the lesser of:
- 25% of the employee's compensation, OR
- The annual dollar limit ($70,000 for 2025, $72,000 for 2026)
This means that even if you could theoretically contribute $72,000, you can only do so if your compensation is at least $288,000. If you earn $200,000, your maximum SEP IRA contribution would be $50,000 (25% × $200,000).
Maximum Compensation Limits
The IRS also caps the amount of compensation that can be considered when calculating SEP contributions:
- 2025: $350,000 maximum compensation considered
- 2026: $360,000 maximum compensation considered
Any income above these thresholds is ignored for contribution calculation purposes. So even if you earn $500,000, the SEP contribution is calculated on only $350,000 (2025) or $360,000 (2026).
Why There's No Catch-Up Contribution for SEP IRAs
Unlike 401(k)s and traditional IRAs, SEP IRAs do not allow catch-up contributions for participants age 50 or older. The contribution limit is the same regardless of your age. This is one significant limitation for those nearing retirement who want to accelerate their savings.
⚠️ Important Limitation
If you're 50+ and want catch-up contribution capability, consider a Solo 401(k) instead—it allows an additional $7,500 catch-up contribution (2025), bringing the total possible contribution to $77,500 for those 50+ versus the flat $70,000 SEP IRA limit.
SEP IRA Contribution Limits for Self-Employed Individuals
The 20% Net Self-Employment Income Rule
If you're self-employed, your SEP IRA contribution limits work differently. Instead of 25% of compensation, you effectively contribute 20% of your net self-employment income.
Why 20% instead of 25%? It's because you must:
- First deduct half of your self-employment tax from your net earnings
- Then calculate your SEP contribution based on the reduced amount
The mathematical result of applying 25% to this adjusted amount equals approximately 20% of your original net self-employment income.
How to Calculate Your Maximum SEP IRA Contribution
📐 Self-Employed SEP IRA Contribution Formula
Step 1: Net Self-Employment Income = Gross Business Income - Business Expenses
Step 2: SE Tax Deduction = Net SE Income × 0.9235 × 0.153 ÷ 2
Step 3: Adjusted Net Earnings = Net SE Income - SE Tax Deduction
Step 4: Max SEP Contribution = Adjusted Net Earnings × 25%
Shortcut: Max SEP ≈ Net SE Income × 20% (approximately)
Example Calculation (2025)
Let's say you have net self-employment income of $200,000:
| Step | Calculation | Amount |
|---|---|---|
| Net SE Income | — | $200,000 |
| SE Tax Deduction | $200,000 × 0.9235 × 0.153 ÷ 2 | $14,130 |
| Adjusted Earnings | $200,000 - $14,130 | $185,870 |
| Max SEP Contribution | $185,870 × 25% | $46,468 |
| Quick Estimate (20%) | $200,000 × 20% | $40,000 |
✅ Pro Tip
The 20% shortcut gives you a conservative estimate. The actual calculation typically allows a bit more (closer to 23%). Work with a tax professional to maximize your contribution.
SEP IRA Contribution Limits for Employers with Employees
The Same Percentage Requirement
Here's where SEP IRAs get expensive for business owners with employees: you must contribute the same percentage for all eligible employees as you contribute for yourself.
If you contribute 25% of your compensation to your own SEP IRA, you must contribute 25% of each eligible employee's compensation to their SEP IRA as well.
The Hidden Cost Example
Let's say you're a business owner earning $280,000 with 5 employees earning an average of $50,000 each:
| Participant | Compensation | Contribution (25%) |
|---|---|---|
| You (Owner) | $280,000 | $70,000 |
| Employee 1 | $50,000 | $12,500 |
| Employee 2 | $50,000 | $12,500 |
| Employee 3 | $50,000 | $12,500 |
| Employee 4 | $50,000 | $12,500 |
| Employee 5 | $50,000 | $12,500 |
| Total Annual Cost | — | $132,500 |
⚠️ The Problem for Business Owners
To put $70,000 into your own retirement, you must also contribute $62,500 for your employees. This dramatically increases the cost of your retirement savings and is one reason many business owners look for alternatives like Maximum Funded IUL — which has no contribution limits and no employee participation requirements. IUL is a personal life insurance policy with its own costs (COI, admin fees, surrender charges); see our full comparison for trade-offs.
Employee Eligibility Rules
To be eligible for a SEP IRA, employees must meet these requirements:
- Be at least 21 years old
- Have worked for you in at least 3 of the past 5 years
- Have earned at least $750 (2025) or $800 (2026) from your business
You can set less restrictive eligibility requirements, but not more restrictive.
SEP IRA Contribution Deadline
The SEP IRA contribution deadline is tied to your federal tax filing deadline:
- 2025 Contributions: Due by April 15, 2026 (or October 15, 2026 with extension)
- 2026 Contributions: Due by April 15, 2027 (or October 15, 2027 with extension)
✅ Last-Minute Tip
You can establish AND fund a SEP IRA up until your tax filing deadline, including extensions. This makes SEP IRAs one of the most flexible options for last-minute retirement tax deductions.
For more details on deadlines and timing strategies, see our SEP IRA Contribution Deadline Guide.
💡 Now That You Know the Limits...
You understand SEP IRAs cap at $70,000 (2025) or $72,000 (2026) per year. But what if you could build tax-free retirement income via policy loans with NO contribution limits?
🎯 What You Get Out
SEP IRA vs Other Retirement Account Limits
How do SEP IRA contribution limits compare to other retirement accounts for 2026?
| Account Type | 2026 Limit | Catch-Up (50+) | Total (50+) |
|---|---|---|---|
| SEP IRA | $72,000 | None | $72,000 |
| Solo 401(k) - Total | $70,000 | $7,500 | $77,500 |
| Traditional/Roth IRA | $7,500 | $1,100 | $8,600 |
| SIMPLE IRA | $17,000 | $3,500 | $20,500 |
| 401(k) Employee | $24,500 | $7,500 | $32,000 |
| Maximum Funded IUL | Unlimited | N/A | Unlimited |
💡 Key Insight
While SEP IRAs offer high limits compared to traditional IRAs, they still cap out at $72,000. For high earners wanting to save more, Maximum Funded IUL allows unlimited contributions with no IRS caps — and provides tax-free income via policy loans (policy must remain in force) rather than fully taxable SEP withdrawals. IUL does include internal costs (COI, admin fees, surrender charges in early years) and some index strategies have caps, though uncapped options are available.
The Limitation of SEP IRA Contribution Limits
While SEP IRAs are excellent savings vehicles, they come with significant limitations that many high-earning business owners find frustrating:
1. Annual Contribution Cap
Even with the $72,000 limit (2026), you're still capped. If you want to save $100,000, $200,000, or more per year for retirement, SEP IRAs simply won't allow it.
2. Full Market Risk
SEP IRA funds are invested in the market with no floor protection. A 2008-style crash could wipe out 40%+ of your retirement savings, and there's nothing protecting your downside.
3. Fully Taxable Withdrawals
Every dollar you withdraw from your SEP IRA in retirement is taxed as ordinary income. At current tax rates, you could lose 22-37% of each withdrawal to taxes.
4. Required Minimum Distributions
Starting at age 73, you must take distributions from your SEP IRA whether you need the money or not—and pay taxes on those forced withdrawals.
5. Employee Contribution Requirements
As shown above, if you have employees, the cost of contributing for yourself multiplies quickly.
⚠️ The Bottom Line
SEP IRAs trade a tax deduction TODAY for fully taxable income TOMORROW—when tax rates may be even higher. Many financial experts believe deferring taxes into an uncertain future is a risky bet.
A Better Alternative: Maximum Funded IUL
For self-employed individuals and business owners who want to go beyond SEP IRA contribution limits, Maximum Funded Indexed Universal Life (IUL) offers a compelling alternative:
| Feature | SEP IRA | Maximum Funded IUL |
|---|---|---|
| Annual Contribution Limit | $72,000 (2026) | Unlimited |
| Retirement Income Taxation | 100% Taxable | Tax-Free via policy loans (policy must remain in force) |
| Market Protection | None (full exposure) | 0% Floor (some strategies capped; uncapped available) |
| Required Minimum Distributions | Yes (age 73) | No RMDs ever |
| Employee Requirements | Must include eligible | Owner-only |
| Death Benefit | None | Tax-free to heirs |
| Internal Costs | Investment management fees (0.1-1.0%) | COI, admin fees, surrender charges in early years; Maximum Funding helps offset over time |
| Tax Deduction | Yes (contributions deductible) | No (after-tax contributions) |
✅ The Smart Strategy
Many business owners use both strategies: Take the SEP IRA tax deduction on a portion of income, then put additional funds into a Maximum Funded IUL for tax-free retirement income via policy loans. This provides tax diversification and protection against future tax rate increases. IUL includes internal costs and some strategies have caps — see our full comparison for details.
Frequently Asked Questions About SEP IRA Contribution Limits
For 2025, the SEP IRA contribution limit is $70,000 or 25% of compensation, whichever is less. Self-employed individuals can contribute up to 20% of net self-employment income. The maximum compensation that can be considered for the 25% calculation is $350,000.
For 2026, the SEP IRA contribution limit increases to $72,000 or 25% of compensation, whichever is less. The maximum compensation that can be considered is $360,000. This represents a $2,000 increase from the 2025 limit.
Yes, you can contribute to both a SEP IRA and a traditional or Roth IRA in the same year. However, your SEP IRA participation may affect the tax deductibility of your traditional IRA contributions. The combined IRA contribution limit for traditional and Roth IRAs is $7,000 for 2025 ($8,000 if age 50+) and $7,500 for 2026 ($8,600 if age 50+).
No, SEP IRAs do not allow catch-up contributions for participants age 50 or older. Unlike 401(k)s and traditional IRAs which offer additional catch-up contribution allowances, the SEP IRA limit is the same regardless of age. If catch-up contributions are important to you, consider a Solo 401(k) which allows an additional $7,500 (2025) for those 50+.
The SEP IRA contribution deadline is your federal tax filing deadline, including extensions. For 2025 contributions, the deadline is April 15, 2026, or October 15, 2026 if you file an extension. You can establish and fund a SEP IRA up until the tax filing deadline.
Self-employed individuals effectively contribute 20% of net self-employment income rather than 25%. This is because you must first deduct half of your self-employment tax and then deduct the SEP contribution itself from your net earnings. The mathematical result of applying 25% to this reduced amount equals approximately 20% of your original net self-employment income.
Yes! Many business owners use both strategies. You can take the immediate tax deduction from a SEP IRA while also funding a Maximum Funded IUL for tax-free retirement income via policy loans (policy must remain in force). IUL includes internal costs and some index strategies have caps, though uncapped options are available. This combination provides tax diversification and protects against future tax rate increases. See our full comparison.
Learn More About SEP IRAs
📚 Complete SEP IRA Guide
Everything you need to know about Simplified Employee Pension plans.
Read Guide →📋 SEP IRA Contribution Rules
Eligibility requirements, same-percentage rules, and employer obligations.
Learn Rules →📅 SEP IRA Deadlines
When to contribute and how to maximize last-minute tax deductions.
See Deadlines →⚖️ SEP IRA vs IUL Comparison
See which provides more retirement income with our interactive calculator.
Compare Now →Want Unlimited Contributions & Tax-Free Retirement Income?
See how Maximum Funded IUL compares to SEP IRA contribution limits. Tax-free income is accessed via policy loans; IUL includes internal costs and some strategies have caps (uncapped available).
Get Your Free IUL IllustrationSpeak with a retirement specialist today
⚠️ Important Disclosures
Educational Purpose: This guide is for educational and informational purposes only. SEP IRA contribution limits are subject to annual IRS adjustments. Always consult IRS publications and a qualified tax professional for guidance specific to your situation.
IUL Policy Costs: Indexed Universal Life policies include cost of insurance (COI) charges, administrative fees, and surrender charges during the early years (typically 10-15 years). These costs reduce cash value accumulation. The Maximum Funding strategy is designed to minimize the impact of these costs by building cash value faster.
Tax-Free Income: Tax-free retirement income from an IUL is accessed through policy loans under IRC Section 7702. The policy must remain in force for loans to maintain their tax-free status. If a policy lapses with outstanding loans, taxes may be owed on gains. IUL contributions are made with after-tax dollars and do not provide an upfront tax deduction like SEP IRA contributions. Tax laws may change with future legislation.
Index Crediting: The 0% floor protects against market losses, but some index strategies have caps that limit upside potential. Uncapped index strategies are available with certain carriers. Participation rates and crediting methods vary by carrier and are subject to change.
Calculator Results: All calculator projections are hypothetical illustrations based on non-guaranteed growth rates. Actual results will vary based on market performance, policy design, fees, and individual circumstances.
Suitability: IUL is not suitable for everyone. It requires medical underwriting and works best as a long-term strategy. Financial Retirement Plans LLC provides insurance products and does not provide tax or legal advice.