For most people on this site, the retirement account we talk about is a Traditional IRA — with a $7,500 annual contribution limit. That's a meaningful amount that can protect a lot of families from the benefits cliff.
But if you have any self-employment income — driving for Uber or Lyft, delivering for DoorDash, doing freelance work, cleaning houses, doing hair, babysitting, caregiving, or running literally any kind of small business — you have access to a different account with limits that make the Traditional IRA look small.
It's called a SEP-IRA — a Simplified Employee Pension IRA. And for self-employed people navigating a benefits cliff, it's one of the most powerful tools available.
"A Traditional IRA lets you shelter $7,500. A SEP-IRA can let you shelter up to $72,000 — from the same income that determines your Medi-Cal eligibility."
What is a SEP-IRA?
A SEP-IRA is a retirement account designed specifically for self-employed people and small business owners. Like a Traditional IRA, contributions are made with pre-tax dollars and reduce your MAGI dollar-for-dollar. Unlike a Traditional IRA, the contribution limit is tied to your income — not a flat dollar cap — which makes it much more powerful for people with higher self-employment earnings.
| Account | 2026 Annual Limit | Who can open it | Reduces MAGI? |
|---|---|---|---|
| Traditional IRA | $7,500 | Anyone with earned income | ✓ Yes |
| SEP-IRA | Up to $72,000 | Self-employed / small biz owners | ✓ Yes |
| Solo 401(k) | Up to $70,000 | Self-employed with no employees | ✓ Yes (traditional) |
| SIMPLE IRA | $18,100 | Employers with ≤100 employees | ✓ Yes |
| 401(k) | $24,500 | Through an employer | ✓ Yes (traditional) |
How the SEP-IRA contribution limit works
You can contribute up to 25% of your net self-employment income to a SEP-IRA, up to a maximum of $72,000 in 2026. "Net self-employment income" is your gross self-employment income minus your business expenses and a deduction for half of your self-employment tax.
Here's what that looks like at a few income levels:
SEP-IRA contribution at different income levels
Every dollar you contribute reduces your MAGI by a dollar
If your net self-employment income is $50,000 and you contribute $7,065 to a SEP-IRA, your MAGI for benefits purposes drops by $7,065. That can be the difference between qualifying for Medi-Cal and not. And unlike a Traditional IRA, the contribution can be made up until your tax filing deadline, including extensions — giving you more time to calculate the optimal amount.
Can I have both a SEP-IRA and a Traditional IRA?
Yes — you can contribute to both in the same year, as long as you have earned income to support both contributions. However, if you or your spouse are covered by a workplace retirement plan, the deductibility of your Traditional IRA contribution may be limited. Your SEP-IRA deduction is separate and generally always fully deductible for self-employed individuals.
In practice, many self-employed people start with a SEP-IRA because the setup is simple, the limits are generous, and the deadline flexibility is helpful for people with irregular income.
The gig worker situation
If you drive for Uber, deliver for DoorDash, do TaskRabbit jobs, or do any other platform-based gig work, you are self-employed in the eyes of the IRS — even if the platform calls you an "independent contractor." That means you can open a SEP-IRA based on that income.
Self-employment tax reduces your net income before the SEP calculation
Self-employed people pay self-employment tax (Social Security + Medicare) on their net earnings, currently 15.3%. Before calculating your SEP contribution, you first deduct half of that self-employment tax from your net income. This is why the contribution amounts in the table above are slightly less than exactly 25% of gross earnings. A tax professional or tax software can calculate your exact allowable contribution.
How to open a SEP-IRA
Opening a SEP-IRA is simpler than most people expect. All the major brokerages — Fidelity, Schwab, Betterment, and others — offer them. The process is similar to opening a Traditional IRA:
- Go to a brokerage and select "SEP-IRA" as your account type
- Fill out IRS Form 5305-SEP (most brokerages walk you through this automatically)
- Make your contribution any time before your tax filing deadline, including extensions
- Report the deduction on Schedule 1 of your tax return
Unlike employer 401(k) plans, there's no annual paperwork filing with the IRS beyond your regular tax return. That simplicity is one of the reasons SEP-IRAs are popular with self-employed people.
The other option worth knowing: Schwab's Individual 401(k)
The SEP-IRA isn't the only powerful retirement account available to self-employed people. Charles Schwab offers an Individual 401(k) — also called a Solo 401(k) or Self-Employed 401(k) — that works differently but can be even more powerful in certain situations, particularly if you're earning a moderate income and want to shelter a larger percentage of it.
Here's the key difference: a SEP-IRA limits your contribution to roughly 20–25% of your net self-employment income. A Solo 401(k) lets you contribute as both the "employee" and the "employer" — meaning you can put in up to $24,500 as the employee (the same as a standard 401(k) limit in 2026) plus an additional employer contribution of up to 25% of net self-employment income, combined up to a total of $70,000.
At lower incomes, the Solo 401(k) can shelter significantly more
At $30,000 of net self-employment income, a SEP-IRA limits you to roughly $4,240 in contributions. A Solo 401(k) lets you contribute up to $24,500 as the employee contribution alone — far more MAGI reduction from the same income. The crossover point varies, but for self-employed people earning under roughly $90,000, the Solo 401(k) often allows larger contributions and therefore a larger MAGI reduction.
Which one is right depends on your income and situation
SEP-IRA: Simpler to set up. No annual IRS filings. Contributions based on income percentage only. Deadline flexibility. Better for higher earners and those who want minimal admin.
Solo 401(k): More setup (IRS Form 5500-EZ once balance exceeds $250,000). Allows an employee + employer contribution structure. Can shelter a much higher percentage of lower incomes. Also allows Roth contributions. Only available if you have no full-time employees other than yourself and a spouse. Schwab offers one of the most straightforward Solo 401(k) products available — no fees, and easy to open online.
If you're self-employed and your income is on the lower end — say, under $60,000 — it's worth running the numbers on both before deciding which to open. A tax professional or even a free calculation tool can tell you which account allows the larger deduction for your specific situation, which may mean the larger MAGI reduction too.
IRS guidance on SEP-IRA contributions
The IRS publishes official guidance on calculating your SEP-IRA contribution as a self-employed person at irs.gov ↗. Also see our Resources page for additional official references.
See your MAGI with a SEP-IRA contribution
Use the benefits cliff calculator to see how a SEP-IRA contribution changes your eligibility. Enter it as your monthly contribution amount under the retirement slider.
Try the calculator →Ready to open a SEP-IRA? See our recommended brokerages →