A SEP IRA is an employer-funded plan that fits profitable, owner-heavy firms wanting flexible contributions with higher limits. A SIMPLE IRA is an employee-deferral plan with required yearly employer support that fits small firms wanting shared funding.
The choice turns on who puts money in, who must receive it, and how much the rules allow. One approach concentrates funding power with the employer. The other spreads funding between employees and the employer.
Table of Contents
- How is the money put in?
- Which businesses can use each plan?
- What can you contribute in 2026?
- What deadlines and combination rules apply?
How is the money put in?
A SEP is funded only by the business. The Internal Revenue Service explains that contributions go directly to traditional SEP-IRAs for the owner and eligible employees in the employer SEP plan guide. Employees cannot make elective deferrals into a SEP.
That means workers cannot reduce their own paychecks to save in the plan. A SIMPLE IRA works the opposite way. Employees fund their own accounts through salary deferrals. The employer must then add support every year, either as a match or as a nonelective contribution.
Which businesses can use each plan?
A SEP can fit firms of many sizes, including self-employed owners. The employer must contribute the same percentage of pay for all eligible employees.
Coverage generally includes workers age 21 or older with service in 3 of the last 5 years and $800 compensation in 2026. A SIMPLE IRA plan is available only to smaller employers. The Internal Revenue Service limits it generally to businesses with 100 or fewer employees who earned $5,000 or more in the prior year in the SIMPLE IRA plan rules.
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- Choose SEP when the owner wants to fund the plan alone and keep the formula uniform.
- Choose SIMPLE when the goal is employee deferrals plus a required employer contribution.
- Check headcount, prior-year pay, age, service, and pay thresholds before adopting either plan.
What can you contribute in 2026?
A SEP allows larger employer contributions for profitable years. For 2026, the Internal Revenue Service caps SEP contributions at the lesser of 25% of compensation or $72,000 in the SEP contribution limits for 2026. A SIMPLE IRA allows smaller individual deferrals. For 2026, employees can defer up to $17,000, plus $4,000 catch-up at age 50 or older.
Plans with 25 or fewer employees can allow an $18,100 deferral. The employer must contribute every year to a SIMPLE IRA. The choice is a dollar-for-dollar match up to 3% of pay or a 2% nonelective contribution to all eligible employees. A profitable owner who wants to contribute $40,000 for herself must apply the same SEP percentage to staff, while a SIMPLE owner accepts lower personal deferrals to let staff save.
What deadlines and combination rules apply?
A SIMPLE IRA generally must be the employer's only retirement plan for that year. It must be established between Jan. 1 and Oct. 1.
A SEP allows later action. It can be established and funded by the business tax-filing deadline with extensions. That timing helps a profitable business decide after year-end. Do not adopt a SIMPLE IRA if another qualified plan will cover the same year. Use a SEP when flexible timing matters or when profits vary and the employer may skip contributions in lean years.
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