Quick Answer
A SEP-IRA lets only the employer contribute, up to the lesser of $72,000 or 25% of compensation, with immediate 100% vesting. A SIMPLE IRA requires both employee deferrals (up to
Quick Answer: A SEP-IRA lets only the employer contribute, up to the lesser of $72,000 or 25% of compensation, with immediate 100% vesting. A SIMPLE IRA requires both employee deferrals (up to $17,000) and mandatory employer contributions, capped at employers with 100 or fewer employees, with a steep 25% early withdrawal penalty in the first 2 years.
7,000) and mandatory employer contributions, capped at employers with 100 or fewer employees, with a steep 25% early withdrawal penalty in the first 2 years.For small businesses and self-employed individuals, setting up a full 401(k) plan can be complex and expensive. SEP-IRAs and SIMPLE IRAs offer simpler alternatives with meaningful retirement savings capacity.
How Does a SEP-IRA Work?
A SEP-IRA allows the employer to contribute directly to employees' individual retirement accounts with minimal administrative burden.
What Are the Key Features?
- Maximum contribution (2026): lesser of $72,000 or 25% of compensation
- Compensation cap (2026): $360,000 (only the first $360,000 of an employee's pay is considered)
- Only the employer contributes; no employee elective deferrals (except under a Salary Reduction SEP (SAR-SEP) grandfathered before 1997)
- Ideal for self-employed individuals and small businesses
- Immediate 100% vesting; once the employer contributes, the money belongs to the employee
- Contributions are tax-deductible for the employer
- Simple to establish using a written SEP agreement, such as IRS Form 5305-SEP. The employer completes, signs, and retains the form; it is not filed with the IRS. Eligible employees receive the required information and have individual SEP-IRAs established for them.
- The SEP agreement supplies the written plan terms without a separately drafted 401(k) plan document or a separate plan-level trust. SEP contributions go directly to employees' IRAs, and the employer generally has no annual Form 5500 filing when the applicable disclosure requirements are met.
Who Must an Employer Cover?
Employers must generally cover employees who:
- Are at least age 21
- Have worked for the employer in at least 3 of the last 5 years
- Received at least $800 in compensation (2026)
Exam Tip: Gotchas
- SEP-IRA contributions come from the employer only. Employees do not make elective deferrals.
- Both SEP and SIMPLE IRAs vest immediately with no vesting schedule.
How Does a SIMPLE IRA Work?
A SIMPLE IRA is designed for small employers and provides both employee deferrals and mandatory employer contributions.
What Are the Eligibility Requirements?
- Available to employers with 100 or fewer employees who earned at least $5,000 in the preceding year
- The employer generally cannot maintain any other retirement plan
What Are the 2026 Contribution Limits?
- Employee deferral limit: $17,000 ($18,100 under the SECURE 2.0 enhanced limit, which is automatic for an employer with 25 or fewer employees earning $5,000 or more that had no other retirement plan in the prior 3 years, and elective for an employer with 26 to 100)
- Age 50+ catch-up: $4,000
- Age 60-63 super catch-up: $5,250
- Employer must either:
- Match employee contributions dollar-for-dollar up to 3% of compensation, OR
- Make a 2% non-elective contribution for all eligible employees (regardless of whether they contribute)
Exam Tip: Gotchas
- The $18,100 enhanced deferral limit is automatic for an employer with 25 or fewer employees (counting those who earned $5,000 or more) that had no other retirement plan in the prior 3 years.
- An employer with 26 to 100 employees may elect it, but only by raising its own contribution to a 4% match or a 3% nonelective contribution. Every other SIMPLE IRA uses the standard $17,000 limit.
Why Does SIMPLE Have a 25% Early Withdrawal Penalty?
This is a key SIMPLE IRA rule:
- Distributions within the first 2 years of participation carry a 25% early withdrawal penalty (instead of the standard 10%)
- After 2 years, the standard 10% penalty applies for withdrawals before age 59-1/2
- During the first 2 years, a SIMPLE IRA can only be rolled over to another SIMPLE IRA
- After 2 years, rollovers to a traditional IRA or other qualified plan are permitted
Exam Tip: Gotchas
- SIMPLE IRA early withdrawals within the first 2 years carry a 25% penalty, not the standard 10%. The 2-year period starts from the date of the employee's first participation in the plan, not from each contribution.
- SIMPLE IRA employer contributions are mandatory: the employer must match up to 3% or make a 2% non-elective contribution.
How Do SEP-IRA and SIMPLE IRA Compare?
| Feature | SEP-IRA | SIMPLE IRA |
|---|---|---|
| Who contributes | Employer only | Both (employee deferrals + employer match/non-elective) |
| Max contribution (2026) | $72,000 or 25% of comp | $17,000 employee + employer match |
| Employer size limit | None | 100 or fewer employees |
| Employer contribution | Discretionary | Mandatory (match or 2% non-elective) |
| Vesting | Immediate (100%) | Immediate (100%) |
| Early withdrawal penalty | Standard 10% | 25% in first 2 years |
| Ideal for | Self-employed, small business | Small employers wanting employee participation |
What Should You Check on Exam Day?
- Remembered only the employer contributes to a SEP-IRA; a SIMPLE IRA requires both employee deferrals and a mandatory employer match or non-elective contribution.
- Confirmed SIMPLE IRA eligibility is capped at employers with 100 or fewer employees; SEP-IRA has no such employer-size cap.
- Applied the SIMPLE IRA's 25% early withdrawal penalty only within the first 2 years of participation, measured from the date of first participation, not each contribution.
- Checked both SEP-IRA and SIMPLE IRA vest immediately at 100%, unlike employer plans with graded or cliff vesting schedules.