Can I Make a SEP IRA Catch-Up Contribution?

A Simplified Employee Pension (SEP) IRA offers a streamlined way for self-employed individuals and small business owners to save for retirement. These plans are known for their higher contribution limits compared to Traditional IRAs and their relative ease of administration. Savers age 50 and over are able to make additional “catch-up” contributions to their retirement accounts to accelerate their savings as they approach their post-work years.

Understanding SEP IRA Contribution Rules

The contribution framework for a SEP IRA is distinct from many other retirement plans because contributions are made exclusively by the employer. For a self-employed individual, this means they act as their own employer to fund the account. This employer-only funding model is the primary reason that SEP IRAs do not have a specific, separate provision for age-based catch-up contributions.

An employer must contribute the same percentage of compensation for every eligible employee. For example, if the business owner decides to contribute 10% of their own compensation, they must also contribute 10% of compensation for every other eligible employee. This uniform percentage rule prevents individuals from adding extra amounts on their own behalf.

Contributions to a SEP IRA are limited annually to the lesser of 25% of compensation or a specific dollar amount set by the IRS, which is $70,000 for 2025. The amount of compensation that can be considered for this calculation is also capped; for 2025, this cap is $350,000. These limits apply to the total employer contribution and are not increased for participants who are age 50 or over.

Contribution Calculation for the Self-Employed

For self-employed individuals, such as sole proprietors or partners, calculating the maximum allowable contribution to a SEP IRA is different because their “compensation” is not a simple salary figure. The calculation is based on net adjusted self-employment income. This figure is derived from the net profit from the business, which is calculated on Schedule C of IRS Form 1040.

The first step is to determine net earnings from self-employment by taking the gross business income and subtracting all ordinary and necessary business expenses. From this net profit, you must then subtract one-half of the self-employment taxes paid. This deduction accounts for the employer’s share of FICA taxes that a traditional employer would pay.

While the contribution rate for employees is up to 25%, for the self-employed individual, the effective rate is lower. Due to the circular logic of the calculation (the contribution itself is a deductible business expense, which lowers net income), the actual maximum contribution rate for a self-employed person is effectively 20% of their net adjusted self-employment income. For instance, if net adjusted self-employment income is $100,000, the maximum SEP IRA contribution would be $20,000.

Alternatives for Making Catch-Up Contributions

Individuals age 50 and over who want to save more than their SEP limit allows must look to other types of retirement accounts. It is permissible to contribute to other plans simultaneously, provided you have eligible income and adhere to the separate limits for each account type.

You can also contribute to a Traditional or Roth IRA. For 2025, an individual can contribute up to $7,000 to an IRA, plus an additional $1,000 catch-up contribution if they are age 50 or older, for a total of $8,000. This contribution is entirely separate from any employer contributions made to a SEP IRA. The ability to deduct Traditional IRA contributions or contribute to a Roth IRA may be subject to income limitations.

For self-employed individuals with no employees (other than a spouse), a Solo 401(k) is an alternative. This plan allows for contributions as both the “employee” and the “employer.” As an employee, an individual can contribute up to $23,500 in 2025. For 2025, the catch-up contribution for those age 50 and over is $7,500, but this increases to $11,250 for savers aged 60 to 63.

A SIMPLE IRA is another plan that allows for catch-up contributions. These plans permit employee salary deferrals and have their own set of rules and limits. For 2025, an employee can contribute up to $16,500. The catch-up contribution for those age 50 and over is $3,500, but for participants aged 60 to 63, this increases to $5,250 in 2025.