Business owners often look for retirement plans that are simple to manage and flexible enough to support long-term saving. The SEP IRA and SIMPLE IRA can meet those needs. Both plans offer higher contribution limits than a traditional or Roth IRA, and they are easier to administer than a full 401k program. These features make them appealing for owners who want structure without complexity.
Readers often compare these plans because each supports a different goal. The SEP IRA tends to favor business owners who want larger employer contributions. The SIMPLE IRA tends to support businesses with employees who need a straightforward way to save through payroll.
Below we break down how the plans align and where they differ so you can see which option may fit your situation.
SEP IRA vs SIMPLE IRA: An Overview
| Feature | SEP IRA | SIMPLE IRA |
| 2024 contribution limit | Up to $69,000 | Up to $16,000 |
| 2025 contribution limit | Up to $70,000 | Up to $16,500 |
| Catch-up contributions | Not available | Available. $3,500 for 2024 and 2025 for participants age 50 or older. Up to $5,250 in 2025 for eligible participants age 60–63 if plan requirements are satisfied. |
| Roth option | Allowed if the employer adopts Roth SEP IRA contributions under SECURE 2.0. | Allowed if the employer adopts Roth SIMPLE IRA contributions under SECURE 2.0. |
| Can employees contribute? | No. Only employers fund the account. | Yes. Employees can defer salary into the plan. |
| Employer contributions | Optional and set by the employer each year. | Required each year through either matching or nonelective contributions. |
| Withdrawal age | 59½ | 59½ |
| Withdrawal tax | Withdrawals are treated as regular income. | Withdrawals are treated as regular income. |
| RMD | Yes | Yes |
How a SEP IRA Works
A SEP IRA gives business owners a flexible way to save more than they could through a traditional or Roth IRA. The plan is easy to administer and can support large employer contributions, which is why many small businesses use it when they want high savings potential without complex plan requirements. The structure also creates clear distinctions from a SIMPLE IRA because employees do not make their own contributions.
Before reviewing the detailed rules, it helps to understand how a SEP IRA operates at a practical level.
Key Features of a SEP IRA
A SEP IRA can be opened by almost any type of business. Sole proprietors, partnerships, and corporations all qualify. The plan also works for businesses with employees, although contribution rules affect how expensive it becomes as headcount grows.
Eligibility
- Any business owner can establish a SEP IRA, with or without employees.
- The plan can cover eligible employees once it is set up.
Contribution Limits
- Up to $69,000 for 2024.
- Up to $70,000 for 2025.
- SEP IRAs do not offer catch-up contributions.
Contribution Rules
- Only employers contribute.
- Contributions are set as a percentage of compensation.
- Up to 25% of compensation can be contributed if the business is incorporated.
- The effective limit is closer to 20% for unincorporated businesses due to how self-employment income is calculated.
Tax Treatment
- Traditional SEP contributions are made with pre-tax dollars and are deductible to the business.
- Earnings grow tax-deferred until withdrawn.
- Roth SEP contributions are now allowed under SECURE 2.0 if the employer offers the Roth feature. Roth contributions are made with after-tax dollars and qualified Roth distributions can be received tax-free.
Withdrawals
- Distributions are allowed without penalty at age 59½.
- Withdrawals before that age generally create a 10% early withdrawal penalty, plus income taxes on pre-tax amounts.
- Traditional SEP withdrawals are taxed as regular income.
- Roth SEP withdrawals can be tax-free when part of a qualified Roth distribution.
Required Minimum Distributions (RMDs)
- SEP IRAs follow the same RMD rules as traditional IRAs.
- RMDs generally begin at age 73 under current law.
- Note: The IRS Uniform Lifetime Table is commonly used to calculate annual RMDs.
Investment Options
SEP IRA assets can be invested in mutual funds, ETFs, stocks, bonds, and similar market-based investments.
Equal Percentage Contributions for Employees
Business owners often consider a SEP IRA because of its high contribution limit. The plan becomes more complex once employees enter the picture since employer contributions must follow an equal percentage rule.
Under this requirement, a business owner who contributes a set percentage of their own compensation must contribute the exact same percentage for every eligible employee. For example, a 10% employer contribution for the owner means a 10% employer contribution for each eligible employee.
This structure can increase total costs for businesses with larger teams. It is one reason SEP IRAs are commonly used by businesses with only a few employees.
Employees cannot contribute.
- All funding comes from the employer.
- Contributions are immediately 100% vested, which means employees own the funds as soon as they are deposited.
Who qualifies as an eligible employee?
- Age 21 or older.
- Worked for the business for at least 3 of the last 5 years.
- Earned at least $750 in compensation in 2024 and $750 in 2025.
Contributions are discretionary.
- A business can skip employer contributions entirely in a down year.
- This flexibility distinguishes the SEP IRA from the SIMPLE IRA, where annual employer contributions are required.
📝 Note: The equal percentage requirement is often the deciding factor when a business evaluates whether a SEP IRA fits its long-term staffing and compensation goals.
How a SIMPLE IRA Works
A SIMPLE IRA gives small employers a streamlined way to offer retirement benefits without the structure and cost of a full 401k plan. It is often selected by businesses with steady payroll needs because employees can contribute through salary deferrals and receive mandatory employer contributions each year. The overall design supports companies that want a predictable benefit structure and a straightforward plan that is easy to maintain.
Before breaking down the employer and employee rules, it helps to understand the main features that shape how a SIMPLE IRA operates.
Key Features of a SIMPLE IRA
A SIMPLE IRA is available only to businesses that meet specific size and plan requirements. The plan works best for employers who want to support retirement saving for their workforce and prefer a predictable annual funding approach.
Eligibility
- Employers must have 100 or fewer employees who earned at least the required amount of compensation in the prior year.
- The business generally cannot maintain another qualified retirement plan for the same year.
Contribution Limits
- Up to $16,000 for 2024.
- Up to $16,500 for 2025.
- Employees age 50 or older can contribute an additional $3,500 for both 2024 and 2025.
- A higher “super” catch-up of $5,250 may be available in 2025 for participants age 60–63 if the plan meets SECURE 2.0 conditions.
Employee Contributions
- Employees can make salary-reduction contributions.
- These contributions can be traditional (pre-tax) or Roth contributions if the employer offers a Roth SIMPLE IRA under SECURE 2.0.
- Employee deferrals occur through payroll and reduce taxable income when made pre-tax.
Employer Contributions
- Annual employer contributions are required.
- Employers must choose one of the following approaches:
- A 2% nonelective contribution for each eligible employee, based on compensation up to $345,000 in 2024 and $350,000 in 2025.
- A matching contribution of up to 3% of compensation, subject to the same annual limits.
- All employer contributions are immediately 100% vested.
Tax Treatment
- Traditional SIMPLE IRA contributions reduce taxable income and grow tax-deferred.
- Roth SIMPLE IRA contributions, when allowed, are made with after-tax dollars and can produce tax-free qualified Roth distributions.
Withdrawals
- Qualified withdrawals begin at age 59½.
- Early withdrawals may trigger a 10% penalty plus income taxes.
- If a withdrawal occurs within the first two years of participation, the early withdrawal penalty increases to 25% under current law.
Required Minimum Distributions (RMDs)
- SIMPLE IRAs follow standard RMD rules.
- RMDs generally begin at age 73.
- The IRS RMD tables determine each year’s required amount.
Investment Options
- Funds can be invested in mutual funds, ETFs, stocks, bonds, and other common market investments.
Mandatory Employer Contributions
A SIMPLE IRA differs from a SEP IRA in one significant way. Employer contributions are not optional. Businesses must fund the plan every year, which gives employees a predictable benefit and ensures the plan meets IRS requirements.
The contribution method chosen by the employer also influences employee decisions:
- Matching contribution approach: Employees who contribute from their salary can receive a match of up to 3% of compensation. This encourages participation since the match depends on employee contributions.
- Nonelective contribution approach: Employees receive a 2% employer contribution even if they choose not to contribute to their own accounts. This can be useful when participation rates are uncertain.
📝 Note: The required nature of employer contributions is often a deciding factor when choosing between a SIMPLE IRA and a SEP IRA, especially for companies that want consistent annual funding.
When to Choose a SEP IRA or SIMPLE IRA
Choosing between a SEP IRA and a SIMPLE IRA depends on the business structure, cash flow, and the long-term goals of the employer. Each plan serves a different type of organization because contribution rules, funding requirements, and employee participation vary in important ways.
A SEP IRA generally supports businesses with few or no employees. The equal percentage contribution rule creates higher costs as staff numbers grow. This rule also makes the plan attractive for sole proprietors or small teams because contributions can be adjusted or skipped entirely in years when profits decline. That flexibility can be valuable for businesses that do not have predictable annual income.
A SIMPLE IRA tends to work better for companies with steady earnings and a larger workforce, up to 100 employees. Employees can contribute through payroll, which increases participation. Employers must also make contributions every year, which adds stability but reduces flexibility if profits fluctuate.
Key points to compare:
✅ SEP IRAs offer flexible employer contributions. SIMPLE IRAs require annual employer funding.
✅ SIMPLE IRAs allow both employee and employer contributions. SEP IRAs allow employer contributions only.
✅ SIMPLE IRAs can be structured with pre-tax or Roth salary deferrals if the plan adopts Roth contributions under SECURE 2.0.
✅ SEP IRAs become less cost-effective as the employee count rises because every eligible employee must receive the same contribution percentage.
Self-employed individuals with no employees can use either a SEP IRA or a SIMPLE IRA. However, many choose a Solo 401k because it provides more contribution flexibility and several tax advantages. A Solo 401k also allows Roth contributions, higher potential limits for those age 50 or older, and broader investment access, including certain alternative investments.
Final Thoughts
Both the SEP IRA and SIMPLE IRA give business owners practical ways to support retirement saving without the complexity of a traditional 401k plan. The right choice depends on the size of the business, expected profit patterns, and whether employee contributions are a priority.
A SEP IRA offers flexibility for employers who want control over annual funding. A SIMPLE IRA provides a structured approach that encourages employee participation through payroll contributions.
Self-employed individuals may also compare these plans with a Solo 401k when evaluating long-term tax and savings potential.
Disclaimer:
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