A sunny beach in Florida or a cabin in the mountains of Colorado. The chance to set your own schedule and decide what your day entails. However you envision your dream life, it probably doesn’t include punching a time clock or logging on to a computer every morning.
Along with buying a house and maybe a dog, retiring comfortably has become a core part of the American dream. The ability to have financial freedom after years of hard work is something everyone deserves.
But how do you actually get there?
Are you a small business owner or self-employed professional wondering how to save for retirement?
Have you heard of SEP and SIMPLE IRAs but aren’t sure which one is best for you?
When most people think of retirement savings, they think of saving a percentage of their income into traditional accounts like a 401 (k) through their employer or an IRA that they have set up outside of work. But what about other options? What about companies that are not large enough to sponsor a 401(k) plan? Or a sole proprietor who wants to build up a nest egg?
If you find yourself in a similar situation, you still have powerful retirement options. Two of the best options for small businesses and self-employed individuals are the SEP and SIMPLE IRA plans. Each has its advantages, disadvantages, and best use cases. Choosing the right one can be a major step towards securing your dream retirement scenario.
What You’ll Learn
In this article, we’ll break down:
- What SEP and SIMPLE IRAs are and how they work
- The key differences between them
- Which plan is best for your specific business and retirement goals
By the end, you’ll have a clear understanding of which plan makes the most sense for you and your employees, so you can start building your financial future today.
What is a SEP vs. SIMPLE IRA? Key Differences Explained
SEP IRA: Simplified Employee Pension
Let’s start with the basics of each plan. A SEP (Simplified Employee Pension) IRA might sound like a SIMPLE IRA based on the name, but don’t be fooled, these plans are very different.
Key Features of a SEP IRA
A SEP IRA can be established by an employer of any size, including self-employed individuals. The plan comes in the form of an IRA called the SEP IRA.
The administration involved with this plan is low, with no annual filing, which makes it great for small businesses. Unlike a traditional 401k plan, where the employee contributes or defers income into the plan, a SEP is only funded by employer contributions. Employers can contribute up to 25% of the employee’s compensation (up to $70,000) for 2025. This blows the normal IRA contribution limit of $7,000 out of the water.
Eligibility for the plan requires an employee to be 21+ years of age, have worked for the employer for 3 of the last 5 years, and earn at least $750. The employer has the option of when they want to contribute. There is no required annual contribution. If an employer does decide to contribute, they must contribute the same percentage to each employee.
Having a SEP does not preclude a company from having other retirement plans. The plan is subject to immediate vesting, can be established up to the tax filing deadline (including extensions), and is subject to normal IRA rules for early withdrawals and penalties (10% for early withdrawals before 59.5).
SIMPLE IRA: Savings Incentive Match Plan for Employees
A SIMPLE IRA is a bit more restrictive in terms of business size, as it is only available to businesses with 100 or fewer employees. Similar to SEPs, there are no filing requirements, and the plan must be set up by October 1st of the current tax year.
The key difference between a SIMPLE IRA and a SEP IRA is that both employers and employees can contribute. However, a company can set up a SIMPLE plan as either a SIMPLE IRA or a SIMPLE 401(k).
Key Features of a SIMPLE IRA
SIMPLE IRAs use an IRA as the funding vehicle, and employees contribute through salary deferrals at a limit of $16,500 per year (or $20,000 if age 50+) for 2025. Employers with SIMPLE IRAs must match up to 3% of compensation or contribute a fixed 2% for all employees.
Key Features of a SIMPLE 401(k)
The SIMPLE 401(k) is identical to the IRA in contribution limits, establishment dates, and requirements to open one. Where they differ is the 401(k) wrapper. They are more complicated to set up administratively, as would be the case with a typical 401(k) plan. Companies without adequate administrative resources may want to avoid this type of plan. Additionally, a SIMPLE 401(k) allows for plan loans, which sets them apart from their IRA counterparts.
Eligibility of the plan generally requires the employee to be 21, have completed at least one year of service, and to have earned at least $5,000 in any two prior years and be expected to earn at least $5,000 in the current year. Vesting is immediate, and no other retirement plan is allowed if you have a SIMPLE.
The penalty for early withdrawals also differs from SEPs in that you pay a 25% penalty if you take a withdrawal within the first 2 years of participation in the plan.
Side-by-Side Comparison: SEP vs. SIMPLE IRA
| Feature | SEP IRA | SIMPLE IRA |
| Eligibility | Any employer, including self-employed | Businesses with ≤100 employees |
| Employee Contributions | ❌ Not allowed | ✅ Allowed (up to $16,500; $20,000 if 50+) |
| Employer Contributions | ✅ Required, up to 25% of compensation (max $70,000) | ✅ Required: 3% match or 2% fixed |
| Vesting | Immediate | Immediate |
| Withdrawal Penalties | 10% before age 59.5 | 25% if withdrawn within first 2 years |
Which Plan is Right for You?
Although these plans do share a lot of similarities, a couple of key points should make the decision clear. A business with more than 100 employees should opt for a SEP. If you simply want a plan that is contributed to by the business without the consideration of employee deferrals, the SEP plan is the right answer. If you want to give your employees the opportunity to contribute, along with matching their contributions, the SIMPLE could be the way to go. Depending on your administrative capabilities, the SIMPLE IRA may be a simpler option for you. Whichever path you choose, know that you are playing a role in not only yourself but the retirement of your hard-working employees.
Final Thoughts: Your Retirement, Your Choice
Imagine the cool wind through your hair as you sip a margarita and hear the ocean crash along the shore. Or you hear the birds chirping as you wake up in the mountains. Whatever your dream retirement looks like, the first step to achieving it is choosing the right plan. Best of luck on that path.
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