SEP-IRA and SIMPLE IRA are the two primary retirement plans for self-employed individuals and small businesses that want high contribution limits without the administrative complexity of a 401(k). A SEP-IRA allows contributions of up to 25% of compensation (up to $70,000 in 2026) and can be set up and funded as late as the tax return due date with extensions. A SIMPLE IRA allows both employee elective deferrals and employer matching, making it more like a mini-401(k) for small employers.
SEP-IRA: Lesser of 25% of compensation or $70,000. Self-employed: 20% of net self-employment income (after SE tax deduction). Deadline: tax return due date including extensions (October 15 for individuals).
SIMPLE IRA employee deferral: $16,500 ($20,000 if age 50+; SECURE 2.0 super catch-up $20,625 for ages 60-63). Deadline: must be established by October 1 of the year it takes effect.
SIMPLE IRA employer match: Either 3% of compensation (matching) or 2% non-elective for all eligible employees.
The SEP-IRA is the simplest high-contribution retirement vehicle for sole proprietors, single-member LLCs, and consultants. No plan documents beyond IRS Form 5305-SEP. No annual filing with the IRS. Contributions are discretionary each year - you can contribute the maximum one year and nothing the next. The entire contribution is deductible as an above-the-line adjustment on Schedule 1.
The self-employed contribution rate is effectively 20% of net self-employment income (not 25%) because the deduction reduces the base. Specifically: deductible contribution = (net SE income - SE tax deduction) x 0.25 / 1.25 = net SE income x 0.20.
The SIMPLE IRA is designed for employers with 100 or fewer employees. Employees can elect to defer salary up to $16,500 in 2026. The employer must either match up to 3% of compensation (but can reduce to 1% in up to 2 of any 5 years) or make a 2% non-elective contribution for all eligible employees regardless of whether they contribute. Unlike a 401(k), SIMPLE IRA assets are immediately 100% vested - employees own all contributions from day one.
SIMPLE IRAs have a 2-year rule: distributions within the first 2 years of participation are subject to a 25% early withdrawal penalty instead of the standard 10%. Rollovers within the 2-year period can only go to another SIMPLE IRA, not to a traditional IRA or 401(k).
For a self-employed individual with no employees and high income, the Solo 401(k) often wins on contribution limits because it allows both an employee deferral ($23,500) and an employer contribution (25% of W-2 or 20% of SE income), potentially reaching $70,000 total with lower income requirements than the SEP. For a business with employees, the SIMPLE IRA is simpler and cheaper to administer than a 401(k). The SEP-IRA is best when maximum flexibility (variable annual contributions, late setup) matters more than maximizing at a given income level.