Simple IRA vs. SEP-IRA

Most people have heard of traditional IRAs and Roth IRAs. Both are popular vehicles for saving money for your retirement, separated only by their tax treatment. There are also two other types of individual retirement accounts that aren’t as common: SIMPLE IRAs and SEP-IRAs.  Knowing what each of these accounts offers can help you decide which is right for you, or which to offer your employees if you’re a small business owner. 

A financial advisor can help you create a financial plan to reach your retirement goals.

What Is a SIMPLE IRA?

A SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account. 

It is a type of employer-sponsored retirement plan for small businesses with 100 or fewer employees. It allows both employers and employees to contribute to retirement savings in a straightforward and cost-effective manner. 

A SIMPLE IRA functions fairly similarly to a traditional IRA but has a higher contribution limit.

How a SIMPLE IRA Works

Eligible employees can choose to make elective deferrals. This works just like a 401(k) plan, where employees defer a certain amount of their pre-tax income into the plan. 

The employer can also make contributions to employee accounts, either by matching employee contributions or as a nonelective contribution. In a nonelective contribution, the employer deposits money into the employee’s account, regardless of the employee’s participation in the plan that year.

Unlike some other types of retirement plans, you cannot opt out of a SIMPLE IRA if you are eligible. You can choose not to contribute to your account, but you must receive non-elective company contributions if you refuse this free money.

Who Can Open a SIMPLE IRA? 

Anyone can set up a traditional IRA, but it can be an especially attractive option for those without access to a workplace savings plan, such as a 401(k). 

A small business owner or sole proprietor can open a SIMPLE IRA, both for themselves and for their employees. Eligible employees must have earned at least $5,000 in compensation from the company during any two years before the current year and must expect to make at least that much in the current calendar year.

What Is a SEP-IRA?

A SEP-IRA is a simplified employee pension plan. It seeks to streamline the process for self-employed and small business owners to access tax-deferred savings. It also helps provide savings vehicles to employees of small businesses.

How a SEP-IRA Works

Unlike other workplace retirement plans, employees enrolled in a SEP-IRA do not contribute to it themselves. Instead, the employer contributes on their behalf. 

For the 2026 tax year, the employer can contribute up to 25% of an employee’s compensation or $72,000, whichever is less. Employers decide whether and when to make SEP-IRA contributions; there are no required annual contributions. 

When contributions are made, they must be allocated evenly. This means that both the business owner and all eligible employees receive the same percentage of compensation.

Who Can Open a SEP-IRA? 

Anyone who is a business owner with at least one employee can open a SEP-IRA. 

Additionally, these financial accounts are available to those with freelance income. All contributions are tax-deductible for your business or yourself if you’re opening one with your freelance income. 

Keep in mind that only the business can contribute to these accounts, not its employees.

SIMPLE IRAs vs. SEP-IRAs

If you are the sole proprietor of a small business, you can choose between a SIMPLE IRA or a SEP-IRA for yourself and your employees. The two plans share several features but differ in flexibility and also in how contributions are made.

A SIMPLE IRA allows both employees and the business owner or sole proprietor to make contributions. A SEP-IRA, by contrast, permits only employer contributions made on behalf of both the owner and eligible employees. 

The contribution limits for SIMPLE IRAs and SEP-IRAs also differ.

• For the 2026 tax year, SEP-IRA contributions are limited to 25% of an employee’s compensation or $72,000, whichever is less. 
• SIMPLE IRA employee contributions are capped at $17,000, with a standard catch-up contribution limit of $4,000 for those age 50 and older. Workers ages 60 to 63 can make higher catch-up contributions of up to $5,250

In practice, SEP-IRAs are often used by businesses with fewer than 100 employees because employer contributions can vary from year to year based on cash flow. SIMPLE IRAs may be used by businesses of any size and involve required employer contributions each year. 

The charts below compare key differences between the two plans and outline their respective contribution limits.

Comparison of Plans for 2026

Comparison of Plans for 2025

Employer Obligations and Administrative Rules

Employer responsibilities differ between SIMPLE IRAs and SEP-IRAs, particularly around contribution requirements. 

SIMPLE IRAs require employer contributions every year. Employers must either match employee deferrals up to the required limit or make a fixed non-elective contribution for eligible employees, regardless of whether employees contribute. This creates a recurring obligation that applies each plan year. 

SEP-IRAs do not require annual contributions. Employers decide each year whether to contribute, setting the contribution amount based on business income and cash flow.

Employee eligibility and participation rules also differ. SIMPLE IRAs require employers to include employees who meet defined compensation and service thresholds, which can trigger mandatory participation once those criteria are met. 

SEP-IRAs allow employers to set eligibility standards within IRS limits, but once an employee qualifies, the employer must apply the same contribution percentage to all eligible participants, including the owner.

Administrative structure varies by plan type. SIMPLE IRAs operate on a fixed annual schedule with required employee notices before the start of each year, outlining contribution options and employer formulas. 

SEP-IRAs involve fewer recurring notices and less formal annual administration. For example, plan setup and contributions are often handled closer to the tax filing deadline.

These differences affect payroll coordination, compliance tasks and year-to-year planning. The choice between a SIMPLE IRA and a SEP-IRA shapes ongoing employer obligations, as well as contribution limits and tax treatment.

Bottom Line

If you own a small business and want to help both yourself and your employees save for retirement, you may have to consider the question of SIMPLE IRA vs. SEP-IRA. Both plans help with retirement savings, but there are some key differences. These mostly pertain to how the accounts are funded. Each type of IRA also has different limits for how much money one person can deposit into their account in a given year.

Retirement Tips

• If all of this seems like a lot to you, don’t sweat it. A financial advisor can help you understand retirement and all of its moving parts. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to set up and plan your retirement goals, SmartAsset’s retirement calculator can help you figure out how much you will need to save to retire comfortably.
• It’s important to have some sort of plan for dealing with emergencies in retirement. You never know when an emergency could derail your retirement, whether it’s a medical incident or a child moving back home.

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