Glossary
SEP IRA
A SEP IRA (Simplified Employee Pension) is a retirement account for self-employed people and small businesses in which the employer contributes a percentage of each eligible worker's compensation — up to limits far higher than regular IRA limits — into IRAs owned by the workers.
Only the employer contributes (up to 25% of compensation, capped at a dollar limit well above six figures' worth of savings room for high earners), contributions are discretionary year to year, and the same percentage must generally go to every eligible employee. Setup and administration are minimal — no annual filing for most.
Why it matters in practice
For a self-employed person with no employees, the SEP is often the simplest way to shelter far more than an IRA allows. The catch arrives with staff: the equal-percentage rule means funding the owner's SEP requires funding everyone's, at which point a 401(k) often becomes more efficient. SEP balances also count in the pro-rata math that complicates backdoor Roth contributions.
In California
A SEP IRA counts as an employer-sponsored plan for the CalSavers mandate — an employer maintaining one is exempt from registering.
Related terms: SIMPLE IRA · IRA (Individual Retirement Account) · 401(k) · Backdoor Roth · CalSavers