SEP IRA vs SIMPLE IRA: How they compare

Trevor Williams/Getty Images
Bankrate Logo

Why you can trust Bankrate

While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .

Business owners and the self-employed have more than one way to set up a retirement account for themselves and their employees. Two of the most popular are the SEP IRA and the SIMPLE IRA, both of which offer many of the major tax advantages of a regular IRA. However, these plans also offer business owners a way to avoid the administrative hassle of typical retirement plans such as the 401(k).

While they share the IRA badge with their more well-known cousins, the traditional IRA and Roth IRA, the SEP IRA and SIMPLE IRA are not for individuals to establish but rather for businesses, including sole proprietorships. (If you’re an individual looking to set up a traditional IRA or Roth IRA, then you’ll want to look at the benefits of those plans.)

Here’s how the SEP IRA compares to the SIMPLE IRA and the key factors you should consider when deciding between the two plans.

What are the SEP IRA and SIMPLE IRA?

Only 28 percent of companies with fewer than 10 employees offer a retirement plan, according to the latest data from SCORE, a non-profit provider of mentoring to U.S. small businesses.

For those running their own company or who work for a smaller company, a 401(k) plan may not be feasible. A 401(k) administrator often doesn’t want to deal with a small fry that can’t bring many assets to the plan, and the hassle of running a 401(k) can be too much for a small business.

That’s where the SEP IRA and SIMPLE IRA come in, making it easy for smaller businesses, even one-person shops, to set up a plan for themselves and help their employees, too.


SEP stands for Simplified Employee Pension, and this plan is available for employers (including the self-employed). Employers can avoid the complex reporting requirements that the government usually requires for retirement plans.

With a SEP IRA, only the employer makes contributions to the account. Employers may contribute up to 25 percent of an employee’s pay annually to the account, up to a total contribution of $57,000 for 2020. The employer must contribute an equal percentage for all employees, though it may exclude some who have retirement plans through a union agreement.

The employee is immediately 100 percent vested in all SEP IRA contributions and has full control of the money. With a SEP IRA, employees can enjoy tax-deferred growth until retirement on any deposits.

In terms of distributions, a SEP IRA functions like a traditional IRA, and money is taxed only when it’s withdrawn. If you withdraw money from the account before age 59 ½, you’ll typically be assessed a penalty of 10 percent. And you’ll need to take required minimum distributions on the account following the rules laid out by the IRS, which mandate distributions start by at least age 72.


SIMPLE stands for Savings Incentive Match Plan for Employees, and it’s available for employers (including the self-employed) with no more than 100 employees earning more than $5,000 in the preceding year. Employers can skip the complex federal reporting requirements that are typical of a 401(k), and they can hire a financial institution to administer the program.

With a SIMPLE IRA, employees can have contributions deducted from their paycheck and deposited into their account, where they can grow tax-deferred until retirement.

The plan allows employees to contribute up to $13,500 in 2020, while those over age 50 can add an additional $3,000. These elective deferrals count toward the annual maximum on elective deferrals for this and other retirement programs.

Employers must contribute to their employees’ SIMPLE IRA, and they have two options:

  • Match employees’ contributions dollar for dollar, up to 3 percent of individual earnings.
  • Contribute 2 percent of employees’ wages up to the annual compensation limit of $285,000 for 2020.

When it comes to distributions, a SIMPLE IRA works like a traditional IRA. Money is taxed only when it’s withdrawn. If you withdraw the funds before age 59 ½ or under some special exceptions, the IRS may sock you with a 10 percent bonus penalty and a 25 percent levy in certain circumstances.

You’ll also have to take required minimum distributions under the IRS’s rules. Newly enacted rules as part of the SECURE Act have raised the age to take these distributions to 72.

Key differences between SEP IRAs and SIMPLE IRAs

While the SEP IRA and SIMPLE IRA look a lot like traditional 401(k) programs, they differ in important respects from that as well as from each other. Both programs are set up by employers on behalf of their employees and have similar distribution rules as a traditional IRA.

Key differences between the two programs include the following:

  • The SEP IRA allows only employers to contribute to the plan, and employees are not allowed to add money.
  • The SIMPLE IRA allows employees to add money using elective deferrals from their paycheck, so they can control how much they want to save.
  • With the SIMPLE IRA employers must contribute some amount to their employees’ accounts or risk running afoul of the IRS. They have two choices for contributing.
  • With a SEP IRA, employers may contribute to the plan, but they are not obligated.
  • A SEP IRA allows employers to contribute up to $57,000 (in 2020), or up to 25 percent of an employee’s salary, whichever is less. In contrast, a SIMPLE IRA allows employees to contribute up to $13,500, while employers can add additional contributions.

Both plans are popular with small businesses, especially those who are self-employed, because of the plans’ ability to stash away huge amounts of money above and beyond what they can do in their own personal IRA. Another popular choice for the self-employed is the solo 401(k).

Bottom line

The SEP IRA and SIMPLE IRA were created to help smaller employers, including the self-employed, have a more robust vehicle to help employees save for retirement. The plans boast larger maximum contributions and offer varying benefits, but it’s up to employers to decide which plan works best for them and their financial situation. Finally, the self-employed might consider another retirement plan, the solo 401(k), which offers various other benefits.

Learn more:


Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Senior wealth editor