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SEP IRA vs. SIMPLE IRA: How to Decide for Your Business?

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Small business owners play many roles: boss, accountant, payroll processor and human resources professional to name a few. Name the job and you’ve likely done it. One position that's vital is retirement plan sponsor. Fulfilling that role with a SEP or SIMPLE IRA may give your business and employees tax-saving benefits today while helping to save for the future.

Power for the Future

While there are several retirement plan options available for businesses, two popular options are: SEP IRAs and SIMPLE IRAs. Both can help build up savings for the future. And they are also designed to offer tax advantages for you, your employees and your business.

Tax Benefits (and What to Watch Out For)

Employees: Retirement savings grow tax-deferred, meaning no taxes until the money is withdrawn as long as all requirements are met.*

Employers: Employer contributions are generally tax-deductible business expenses.

*Please note: A 10% penalty may be imposed for withdrawals prior to reaching age 59 ½. And, if withdrawals are made within the first two years of participation in the SIMPLE IRA, the penalty increases to 25%.

What Is a SEP IRA?

A SEP IRA can be used with a business plan of any size, including a sole proprietorship. The 2021 contribution limit is a generous $58,000 a year, or 25% of an employee’s salary. The employer provides all contributions, though no employer contributions are required. Employees in the plan are always 100% vested in plan contributions.


A SIMPLE IRA can be used for a smaller company with up to 100 employees. Though the 2021 contribution limit of $13,500 is much less than a SEP IRA, it’s still more than double the $6,000 limit allowed for a traditional or Roth IRA. Employees can contribute to the plan, and are always 100% vested in plan contributions. Also, SIMPLEs allow “catch-up” contributions for employees age 50 and over.

A breakdown of the differences between SEP IRAs and SIMPLE IRAs (shown below), can help you decide which one may be right for your business.



Company Size

Any size

100 employees or fewer

Amount of Paperwork

Less than other plans

Less than other plans

Contribution Limits

25% of employee salary, up to $58,000 for 2021

$13,500 for 2021 as employee salary deferral, plus 3% of employee salary as an employer contribution

Employer Contributions Required



Employee Salary Deferrals Allowed

No—Employer provides all contributions


Catch-Up Contributions for Employees Over 50



Why Choose a SEP IRA?

Flexibility is one key attraction of a SEP IRA. Business experiencing lean profits one year? You can waive a SEP IRA contribution. As an employer, you decide which years to contribute and which ones not to. However, that also means you won't get the business tax deduction in years you don't contribute.

In addition, SEP IRAs are low cost, easy to set up and maintain, and offer higher contribution limits than some other retirement plans. You also don't have to file additional paperwork with the IRS to maintain your plan.

Why Choose a SIMPLE IRA?

It's in the name. SIMPLE IRAs are frankly one of the simplest plans to manage. In many ways, they act like a 401(k) with employee salary deferrals and potential employer matching—but with less effort and usually less expense. There is no annual IRS filing, no compliance testing and no need for a costly third party to help administer the plan.

Employers can also decide whether they want to match employee contributions or contribute a flat percentage rate each year. But you must do one or the other; you cannot opt out like you can with a SEP.

Explore More SEP and SIMPLE Strengths

SEP and SIMPLE IRAs provide more benefits for small business owners and employees, including:

More for your future: A SEP or SIMPLE IRA allows you and your employees to save more for retirement. Contribution limits are higher than those of traditional or Roth IRAs.

More committed employees: Retirement plans offer a competitive advantage for hiring and retaining talented employees. According to our 2020 8th National Survey of Retirement Savers, employees consider retirement plans one of their most important benefits.

More profitability: Retirement plans contribute to employee financial wellness, and many employees look to their employer to help them with retirement saving. From the same National Survey of Retirement Savers, eight in 10 employees have “some” regret about past saving behavior, with about the same number desiring at least a slight nudge from their employers to save for retirement. 

Timing Is Important

Like just about everything related to taxes and your business, there are deadlines for opening a SEP IRA or SIMPLE IRA.

Due Dates for Opening These Plans

SEP IRAs: Establish by the business's tax deadline plus any extensions.

SIMPLE IRAs: Establish by October 1 of the year the plan becomes effective.

Make Contributions Consistent

Once you establish your retirement plan, you should consider regular contributions. Contributing to a SIMPLE IRA is mandatory, so you know you'll be making that a habit. However, even with the contribution flexibility allowed by a SEP IRA, you might as well take advantage of the tax savings every year, if you can.

Many business owners wait until their Tax Day (plus extensions) to contribute. But making smaller contributions throughout the year may be easier to manage than coming up with one larger sum at tax time. Whichever way you choose, your future will thank you, your employees will thank you and maybe even your accountant will thank you.

Retirement Planning Makes Sense

Discover more about SEP and SIMPLE IRAs, as well as other workplace retirement plans.
Or contact a Business Retirement Specialist at 1-800-345-3533 and get help choosing the right plan.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½. If withdrawals are made within the first two years of participation in the SIMPLE IRA, the penalty increases to 25%.

This information is for educational purposes only and is not intended as a personalized recommendation or fiduciary advice. There are different options available for your retirement plan investments. You should consider all options before making a decision. Our representatives can help you evaluate all of your distribution options.