SEP vs. Annuity: Which Is Better for the Self-Employed?

If you’re self-employed, saving for retirement is your responsibility. Two common tools are SEP IRAs and annuities, but they work in different ways. An SEP IRA gives you tax advantages, control over investments and flexibility. An annuity offers guaranteed income, but usually with less access to your money and slower growth. Understanding the differences can help you choose an option that fits your goals and timeline.

A financial advisor can also help you weigh the pros and cons of a SEP vs. annuity while building a retirement strategy for your specific situation.

A SEP IRA is a retirement savings account for self-employed individuals and small business owners. It allows you to contribute a percentage of your income each year and gives you full control over how you invest your funds.

An annuity, on the other hand, is a financial contract with an insurance company. You pay a lump sum or a series of payments, and, in return, the insurer promises a guaranteed stream of income in the future. Annuities are often preferable when you want lifetime income guarantees rather than investment growth.

These are some of the key areas where they differ.

• SEP IRA: You set up the account through a financial institution, make contributions (up to 25% of your net earnings or $70,000 in 2025, whichever is less) and choose your investments.
• Annuity: You buy a contract from an insurer. Payments can begin immediately via an immediate annuity or at a future date with a deferred annuity.

• SEP IRA: You control withdrawals once you reach retirement age. You can take out as much or as little as you like, subject to required minimum distributions (RMDs) starting at age 73 (75 starting in 2033).
• Annuity: You receive regular payments based on the contract terms. Payments can last for a set number of years or your entire lifetime.

• SEP IRA: Contributions are generally tax-deductible with tax-deferred growth. Withdrawals are taxed as ordinary income.
• Annuity: Premiums use after-tax dollars for payment unless purchased within a retirement account. Growth is tax-deferred, but payouts are taxed as income.

• SEP IRA: Withdrawals before age 59 1/2 incur a 10% penalty plus income taxes, unless an exception applies.
• Annuity: Early withdrawals may be subject to surrender charges and a 10% IRS penalty if taken before age 59 1/2.