Simplified Employee Pension (SEP) IRA vs. SIMPLE IRA: What's the Difference?

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Simplified Employee Pension (SEP) IRA vs. SIMPLE IRA: Overview

A Simplified Employee Pension (SEP or SEP-IRA) and a SIMPLE IRA are similar in several ways but these plans also have differences that set them apart. They include who can contribute and how large a business must be to offer them.

Both are employer-sponsored plans that provide employees with a tax-advantaged way to save for retirement. Contributions grow tax-deferred until they're withdrawn in retirement. Each is designed to be easily set up and cost-effective, particularly when compared to a 401(k) plan. Neither option requires annual IRS reporting.

Key Takeaways

• SEP and SIMPLE IRAs were designed to make it easy for employers to set up tax-advantaged retirement plans for their employees.
• Only employers can contribute to SEP IRAs.
• Businesses with fewer than 100 employees can set up a SIMPLE IRA.
• Any size business can set up a SEP IRA.

SEP IRA

A SEP IRA provides employers with a simplified method to contribute toward their employees' retirement and their own retirement. Only employers can contribute to a SEP IRA, but this includes the self-employed. Only your employer can contribute to your SEP IRA. You cannot contribute to your own plan. Each employee receives the same percentage of contributions.

A SEP IRA allows employers to adjust how much money is contributed depending on the company's cash flow. This makes it ideal for businesses that have fluctuating seasons of good and bad income streams.

A SEP IRA is more flexible with annual contributions than a SIMPLE IRA. Businesses of any size can offer SEP IRAs.

Employers can contribute up to $69,000 in 2024, up from $66,000 in 2023, or 25% of the employee's compensation.

SIMPLE IRA

A SIMPLE IRA helps small businesses create streamlined retirement accounts for their employees and themselves. SIMPLE stands for "Savings Incentive Match Plan for Employees." Only businesses with less than 100 employees can set one up.

A SIMPLE IRA has two contribution formulas that can be used. An employer can either:

• Match up to 3% of the employee's annual contribution or
• Set up a non-elective 2% contribution of each employee's salary without requiring employee contributions.

The contribution limit for employees is $16,000 in 2024, up from $15,500 in 2023. Employees who are age 50 and older can make an additional catch-up contribution of up to $3,500 in 2024.

Key Differences

A SEP IRA allows significantly higher contributions, $69,000 in 2024, compared to the smaller contributions for a SIMPLE IRA which are $16,000 in 2024.

Lastly, SIMPLE IRAs are only available to businesses with 100 employees or less whereas a SEP IRA is available to any size business.

Both SIMPLE IRA and SEP IRA retirement plans are suited for small businesses but a SIMPLE IRA allows for employer and employee contributions. A SEP IRA only allows contributions from the employer.

What Is the Difference Between a 401(k) and a SIMPLE IRA?

The major difference between a 401(k) plan and a SIMPLE IRA plan is the types of businesses that can offer them. A 401(k) plan can be offered by any employer whereas only businesses with less than 100 employees can offer a SIMPLE IRA.

What Is the Difference Between an IRA and a SIMPLE IRA?

Both an IRA and a SIMPLE IRA are tax-advantaged retirement savings accounts but they have differences. An individual can start and manage their own IRA while SIMPLE IRAs are offered by employers, namely businesses with less than 100 employees.

How Is a SEP Different From a Standard IRA?

A SEP IRA and a standard IRA have several differences. A SEP IRA can be offered by any size business but only employers can make contributions. An individual can start and manage a traditional IRA. You can make contributions to your IRA.

The Bottom Line

A SIMPLE IRA has much in common with a SEP IRA. Both retirement plans offer tax advantages. However, they have key differences in what size businesses can offer them and who can contribute. Understanding the differences and knowing how each works will help you decide which is right for your retirement savings plan.

Correction–April 24, 2024: This article has been updated to clarify that only businesses with 100 or fewer employees can offer SIMPLE IRAs. Businesses of any size can offer SEP IRAs.

1. Internal Revenue Service. "SIMPLE IRA Plan."
2. Internal Revenue Service. "Simplified Employee Pension Plan (SEP)."
3. Internal Revenue Service. "Retirement Plans for Self-Employed People."
4. Internal Revenue Service. "Retirement Topics - SIMPLE IRA Contribution Limits."
5. Internal Revenue Service. "SEP Contribution Limits (Including Grandfathered SARSEPs)."
6. Internal Revenue Service. "401(k) Plan Overview."
7. Internal Revenue Service. "Individual Retirement Arrangements."

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A SIMPLE IRA is a retirement savings plan that can be used by most small businesses with 100 or fewer employees.

An IRA transfer is the act of moving funds from an individual retirement account (IRA) to a retirement account, brokerage account, or bank account.

An individual retirement account (IRA) is a retirement savings plan with tax advantages that taxpayers can use to invest over the long term for retirement.

An education IRA is a tax-advantaged investment account for higher education, now more formally known as a Coverdell Educational Savings Account (ESA).

A conduit IRA is an account used to roll over funds from a qualified retirement plan to another qualified plan.

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