SEP IRA Vs. SIMPLE IRA: How They Compare Bankrate Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure

Advertiser Disclosure

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.

How We Make Money

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE:

On This Page

Trevor Williams/Getty Images November 04, 2022 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. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo

The Bankrate promise

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo

The Bankrate promise

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our reporters and editors focus on the points consumers care about most — how to save for retirement, understanding the types of accounts, how to choose investments and more — so you can feel confident when planning for your future. Bankrate logo

Editorial integrity

Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo

How we make money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. 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 . However, these plans also offer business owners a way to avoid the administrative hassle of typical retirement plans such as the . While they share the IRA badge with their more well-known cousins, 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 .) 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 is a SEP IRA

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 mandates for retirement plans. With a , 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 $61,000 for 2022 and $66,000 for 2023. 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 bonus penalty of 10 percent. And you’ll need to take on the account following the rules laid out by the IRS, which mandate distributions start by at least age 72.

What is a SIMPLE IRA

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 , 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 $14,000 for 2022 and $15,500 in 2023, while those age 50 and over can add an additional $3,000 (in 2022) or $3,500 (in 2023). 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 $305,000 for 2022 and $330,000 for 2023. 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 . You’ll also have to take required minimum distributions starting at age 72 under the IRS’s rules.

Pros and cons of a SEP IRA

Advantages of a SEP IRA

Provides a way for you (and employees) to save for retirement: If you’re self-employed, you might not have many options for tax-advantaged retirement savings, and this plan can help. Tax-deferred: Your contributions are made with pre-tax dollars, so you receive a tax deduction today and only pay taxes when you withdraw the money. Easy to set up: A broker offering SEP IRAs can guide you through a few simple steps after you fill out one IRS form. Immediate vesting: Employees enjoy immediate vesting on any employer contribution, so the money is legally theirs as soon as it’s deposited. Make larger contributions: Contribution limits are higher than traditional and , as well as more than what you can contribute to a 401(k). Flexibility: You don’t have to make a contribution every year, for yourself or your employees.

Disadvantages of a SEP IRA

The plan must treat employees the same as you: A SEP IRA is an employer-only contribution. Employees don’t make their own contributions and you must contribute the same percentage of employee compensation as you do to your own account. No catch-up contributions: If you’re age 50 or over, there are no catch-up contributions as there are with IRAs and 401(k)s. However, the higher contribution limits of a SEP IRA might outweigh this negative. No Roth option: Those who prefer socking away money with after-tax contributions and enjoying tax-free withdrawals are out of luck. There is no Roth option, so while your money will grow tax-free, you will still be on the hook for taxes when you take distributions. Penalties for early withdrawal: Like a traditional IRA, if you withdraw your money before age 59 ½, you’ll be hit with taxes and a 10 percent bonus penalty. Required minimum distributions: You have to withdraw a minimum amount from the account starting at age 72.

Pros and cons of a SIMPLE IRA

Advantages of a SIMPLE IRA

Provides a way for you (and employees) to save for retirement: If you’re self-employed, the plan gives you a way to save more in a tax-advantaged account. Tax-deferred growth: Any contributions can grow tax-deferred until they’re withdrawn. Paycheck deductions: Employees can have their contributions deducted from their paycheck, as they would in typical 401(k) plans. Two ways to contribute to plans: Employers can contribute to employees in two ways: match contributions dollar for dollar up to 3 percent of earnings or make non-elective contributions up to 2 percent of an employees’ salary up to the annual compensation limit. Immediate vesting: Employees enjoy immediate vesting on any employer match, so the money is legally theirs as soon as it’s deposited. Employee contributions not reported as income: Any employee contributions will not be reported as income, so it’s as if employees are contributing with pre-tax income. Larger contributions: Contribution limits are higher than for traditional and Roth IRAs, though not more than for a 401(k) or SEP IRA. Catch-up contributions: Employees age 50 or older can save an additional $3,000 (in 2022) or $3,500 (in 2023) as a catch-up contribution.

Disadvantages of a SIMPLE IRA

Limited to smaller companies: Employers must have no more than 100 employees earning more than $5,000 in the preceding year to create a SIMPLE IRA. Employers must fund accounts: Employers are required to fund their employees’ accounts each year. No Roth option: This plan does not offer a Roth version, so employees won’t be able to save with after-tax money and enjoy tax-free withdrawals later. Penalties for early withdrawal: Like a traditional IRA, if you withdraw your money before age 59 ½, you’ll be hit with taxes and a 10 percent bonus penalty. Required minimum distributions: You have to withdraw a minimum amount from the account starting at age 72.

Contribution limits for SEP IRAs and SIMPLE IRAs

Plan Contribution limit (2022) Contribution limit (2023) SEP IRA $61,000 $66,000 SIMPLE IRA $14,000 (plus $3,000 for those over age 50) $15,500 (plus $3,000 for those over age 50)

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 $61,000 (in 2022), or up to 25 percent of an employee’s salary, whichever is less. In contrast, a SIMPLE IRA allows employees to contribute up to $14,000 (in 2022), while employers can add additional contributions. Those annual maximums ratchet higher in 2023. 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. .

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 large 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. SHARE: 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. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money.

Related Articles