Two plans with similar names but very different rules — employer-only contributions vs. salary deferrals with a mandatory match and a two-year rollover restriction.
Both the SEP IRA (Simplified Employee Pension) and the SIMPLE IRA (Savings Incentive Match Plan for Employees) were designed to give small businesses an accessible alternative to the full-complexity 401(k). They use the familiar IRA structure — individual accounts at a custodian, no plan testing, no ERISA filings — which keeps administrative overhead low.
The fundamental difference is who puts the money in. A SEP IRA is funded entirely by the employer — employees make no elective deferrals. A SIMPLE IRA allows employees to defer part of their paycheck, with the employer required to either match those deferrals or make a flat contribution for all eligible employees. That employee-contribution ability is what makes the SIMPLE attractive for businesses whose employees want to save on their own — and what makes the SEP better for self-employed owners who primarily want to maximize their own contributions.
The choice between them often comes down to two factors: whether you want employees to be able to contribute from their paychecks, and whether the SIMPLE IRA's two-year rollover restriction creates a problem for your situation.
| Feature | SEP IRA | SIMPLE IRA |
|---|---|---|
| Who contributes | Employer only | Employee + mandatory employer |
| 2026 employee deferral limit | None (employer contributions only) | $17,000 ($21,000 age 50+); employers with ≤25 employees may use higher limits: $18,100 ($21,950 age 50+) |
| 2026 employer contribution limit | Lesser of 25% of comp or $72,000 | 3% match or 2% non-elective |
| Employer contribution required? | No — discretionary each year | Yes — mandatory each year |
| Employer size limit | No limit | ≤100 employees |
| Setup deadline | Tax filing deadline + extensions | October 1 of the plan year |
| Rollover restriction | None | 2-year rule (SIMPLE-to-SIMPLE only) |
| Early withdrawal penalty (first 2 yrs) | 10% standard | 25% (increases to 10% after 2 years) |
| Vesting | Immediate (100%) | Immediate (100%) |
| Roth option | No | Yes for employee deferrals (new for 2026, at custodians that support it); employer contributions remain traditional |
In a SEP IRA, only the employer (or self-employed individual acting as the employer) makes contributions. Employees cannot make elective deferrals from their paychecks. The employer can contribute up to 25% of each eligible employee's compensation (or 25% of net self-employment income for the owner), with a 2026 cap of $72,000. Contributions are discretionary — the employer can contribute different amounts each year or skip a year entirely.
A SIMPLE IRA allows employees to defer up to $17,000 (2026) from their paychecks — similar to a 401(k) but with lower limits. Catch-up contributions for age 50+ bring the standard limit to $21,000. Employers with 25 or fewer employees may use higher limits: $18,100 base ($21,950 with age-50+ catch-up), and ages 60–63 may defer an additional $5,250 under SECURE 2.0's enhanced catch-up. In exchange, the employer must either: (1) match employee deferrals dollar-for-dollar up to 3% of compensation, or (2) make a 2% non-elective contribution for all eligible employees regardless of whether they contribute. Starting in 2026, Roth SIMPLE contributions are available for employee deferrals at custodians that support it — employer contributions remain traditional (pre-tax).
This is the rule that catches the most people off guard. For the first two years after you first participate in a SIMPLE IRA, you cannot roll or transfer your SIMPLE IRA balance to a traditional IRA, 401(k), or any non-SIMPLE account. You can only move it to another SIMPLE IRA. After two years, the normal rollover rules apply. This restriction also affects the early withdrawal penalty: withdrawals within the first two years face a 25% penalty (not the standard 10%).
A SEP IRA can be established and funded as late as the employer's tax filing deadline, including extensions. For a sole proprietor on extension, that's October 15 of the year after the tax year. This makes the SEP IRA uniquely attractive for high earners who haven't decided on a retirement plan by year-end — you can open one in April or October and still get a prior-year deduction. No other plan offers this level of setup flexibility.
A SIMPLE IRA must be established by October 1 of the calendar year for which it will first be used. A plan started after October 1 cannot be a new SIMPLE IRA for that year. The one exception: if you acquire a business that already had a SIMPLE IRA, you may be treated as maintaining it. This October 1 cutoff is one of the plan's major practical limitations compared to the SEP IRA.
SEP IRAs: employers must cover any employee who earned at least $750 (2026) in any three of the prior five years. SIMPLE IRAs: available only to employers with 100 or fewer employees who earned at least $5,000. Both plans vest employees immediately — there's no waiting period for employer contributions to belong to the employee. This full and immediate vesting is simpler than the vesting schedules used in most 401(k) plans.
Yes — you can have both. However, because SEP IRA contributions count as employer contributions (not employee deferrals), they do not reduce your traditional IRA contribution limit. What they can affect is whether your traditional IRA contribution is deductible. If you're covered by a workplace retirement plan (and a SEP IRA counts), your traditional IRA deduction phases out above certain income thresholds. You can still contribute — you just may not get the deduction.
The 2-year rule prohibits rolling SIMPLE IRA funds into anything other than another SIMPLE IRA during the first two years of participation — starting from the date of your first contribution. This matters if you change jobs, switch financial institutions, or want to consolidate accounts. If you try to roll a SIMPLE IRA to a traditional IRA during those first two years, the IRS treats it as a taxable distribution — plus a 25% early withdrawal penalty (not 10%). After two years, SIMPLE IRA funds can roll anywhere traditional IRA funds can go.
The SIMPLE IRA is the right fit when employees want to save a portion of their own paycheck — the SEP doesn't allow that. For a business where employee participation in saving matters (for recruitment, retention, or culture), the SIMPLE IRA is the simpler and cheaper alternative to a 401(k). For a sole proprietor with no employees who just wants to maximize their own retirement savings, a SEP IRA or solo 401(k) is almost always better.
Yes — a sole proprietor can technically establish a SIMPLE IRA. But it rarely makes sense. The SIMPLE IRA's standard employee deferral limit ($17,000 in 2026) is lower than the SEP IRA employer contribution ceiling ($72,000), and the mandatory employer match adds cost without additional flexibility. A solo 401(k) is usually the better option — it allows both employee deferrals and employer contributions, reaching higher combined limits faster at lower income levels. The SEP IRA wins on simplicity; the solo 401(k) wins on limits.
No — SEP IRA employer contributions are completely discretionary. You can contribute the maximum one year, contribute a smaller percentage the next, and skip entirely in a year with low income. The only requirement is that whatever percentage you contribute for yourself, you must contribute the same percentage for all eligible employees. This flexibility for variable-income years (common for self-employed individuals) is one of the SEP's biggest advantages.
Generally no — an employer cannot maintain both a SEP IRA and a SIMPLE IRA simultaneously for the same group of employees. Offering both would violate the SIMPLE IRA rules, which generally require it to be the only plan maintained by the employer. An employer can offer a SEP IRA one year and switch to a SIMPLE IRA in a later year (subject to the October 1 setup deadline), but not both at the same time. If you want employee deferrals and high employer contribution limits, a 401(k) is the vehicle that provides both — though with more administrative overhead.
The third option for self-employed individuals — higher limits than a SEP, more features than a SIMPLE.
The SIMPLE IRA 2-year rule creates rollover restrictions that don't exist for SEP IRAs or 401(k)s.
All IRA, 401(k), SEP, and SIMPLE limits for 2026 in one table.
SECURE 2.0 brought new catch-up rules, SIMPLE IRA limit increases, and startup credit changes for small employers. The Rundown covers updates as they happen.
This guide is for general education and information only. It does not provide individualized investment, tax, or legal advice, and does not establish a client relationship. Always consult your own tax professional, financial advisor, or legal counsel before making decisions about your accounts or retirement strategy.