Two small-business retirement plans built for simplicity: the SEP, funded by the employer, and the SIMPLE, which adds employee deferrals — both with far less paperwork than a 401(k).
Key takeaways
- SEP IRAs are funded by employer contributions; SIMPLE IRAs allow employee deferrals plus employer contributions.
- Both are lower-administration alternatives to a 401(k).
- Contribution mechanics and limits differ between the two.
What it is
Retirement plans for small businesses and the self-employed. The account is a structure; the investments it holds are separate and carry their own risks.
Who it’s for
- Self-employed individuals and small-business owners
- Employers who want low administrative overhead
- Businesses ready to contribute for employees
- Owners weighing a plan before a Solo 401(k)
How it works
- An employer (including a self-employed individual) establishes the plan.
- Contributions are made to each participant’s IRA.
- Assets grow tax-deferred until withdrawal.
Eligibility
Available to eligible small employers and their employees; the self-employed can sponsor a plan for themselves.
Contributions and funding
SEP: up to 25% of compensation, to a $72,000 cap for 2026 (compensation counted up to $360,000). SIMPLE: $17,000 employee deferral plus a $4,000 catch-up (50+), or $5,250 for ages 60–63 under SECURE 2.0, for 2026. 2026 tax year
A worked example
A sole proprietor with $200,000 of net compensation could contribute up to 25% to a SEP — as much as the $72,000 cap allows. A SIMPLE, by contrast, lets employees defer up to $17,000 (plus catch-ups) alongside a required employer match or contribution.
What it can hold
Publicly traded securities and, in a self-directed model, permitted alternative assets.
Taxes and reporting
Contributions are generally pre-tax; withdrawals are ordinary income. SIMPLE IRAs have a special early-withdrawal rule in the first two years. Requires tax review
Withdrawals and distributions
Ordinary-income treatment; early-withdrawal additional taxes may apply. RMDs apply at the applicable age.
How Investor Services custodies it
Investor Services custodies each participant’s IRA and processes the employer and employee contributions you direct. Plan administration and eligibility decisions rest with the employer.
Risks and limitations
- Plan-administration and eligibility rules must be followed
- Early SIMPLE withdrawals can carry a higher additional tax
- Investment risk, including loss of principal
Common mistakes to avoid
- Overlooking employees who must be covered
- Miscalculating the SEP percentage on self-employment income
- Triggering the SIMPLE two-year early-withdrawal rule
- Confusing SEP and SIMPLE contribution mechanics
Frequently asked questions
SEP or SIMPLE — which fits?
It depends on headcount, desired employee deferrals, and administrative preference.
Can I have employees?
Yes; contribution rules for employees differ between SEP and SIMPLE.
Can the self-employed use these?
Yes.
Educational only. This page is general information, not individualized investment, legal, or tax advice. Rules depend on your account type, transaction, tax year, and circumstances — consult a qualified professional.